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 March 30, 2002
[ ] 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)
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 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 April 26, 2002
---------------------------- -----------------------------
Common Stock, $.01 par value 12,246,567
PART I - Financial Information
Item 1 - Financial Statements
- -----------------------------
KADANT INC.
Consolidated Balance Sheet
(Unaudited)
Assets
March 30, December 29,
(In thousands) 2002 2001
- --------------------------------------------------------------------------------------------------------------------------------
Current Assets:
Cash and cash equivalents $ 98,285 $102,807
Available-for-sale investments, at quoted market value (amortized
cost of $18,240 and $16,625) 18,240 16,625
Accounts receivable, less allowances of $2,503 and $2,515 35,372 39,178
Unbilled contract costs and fees 6,192 10,126
Inventories:
Raw materials and supplies 13,645 13,625
Work in process 5,323 6,962
Finished goods (includes $1,545 and $1,917 at customer locations) 11,405 12,947
Deferred tax asset 8,436 6,991
Other current assets 3,379 3,198
-------- --------
200,277 212,459
-------- --------
Property, Plant, and Equipment, at Cost 68,132 71,710
Less: Accumulated depreciation and amortization 42,594 43,225
-------- --------
25,538 28,485
-------- --------
Other Assets 10,126 10,441
-------- --------
Goodwill (Note 7) 116,194 116,269
-------- --------
$352,135 $367,654
======== ========
2
KADANT INC.
Consolidated Balance Sheet (continued)
(Unaudited)
Liabilities and Shareholders' Investment
March 30, December 29,
(In thousands except share amounts) 2002 2001
- --------------------------------------------------------------------------------------------------------------------------------
Current Liabilities:
Current maturities of long-term obligations $ 585 $ 573
Accounts payable 15,571 18,661
Accrued payroll and employee benefits 6,816 7,990
Accrued warranty costs 4,233 4,598
Customer deposits 2,388 3,070
Accrued merger consideration - 2,824
Other accrued expenses (Note 5) 13,042 15,360
-------- --------
42,635 53,076
-------- --------
Deferred Income Taxes and Other Deferred Items 11,488 11,457
-------- --------
Long-term Obligations:
Subordinated convertible debentures (Note 6) 115,263 118,138
Notes payable 925 1,129
-------- --------
116,188 119,267
-------- --------
Minority Interest 298 297
-------- --------
Shareholders' Investment:
Preferred stock, $.01 par value, 5,000,000 shares authorized;
none issued - -
Common stock, $.01 par value, 150,000,000 shares authorized;
12,745,165 shares issued 127 127
Capital in excess of par value 81,229 81,229
Retained earnings 142,145 143,504
Treasury stock at cost, 506,098 and 505,146 shares (21,359) (21,345)
Deferred compensation - (5)
Accumulated other comprehensive items (Note 2) (20,616) (19,953)
-------- --------
181,526 183,557
-------- --------
$352,135 $367,654
======== ========
The accompanying notes are an integral part of these consolidated financial statements.
3
KADANT INC.
Consolidated Statement of Operations
(Unaudited)
Three Months Ended
------------------------------
March 30, March 31,
(In thousands except per share amounts) 2002 2001
- -------------------------------------------------------------------------------------------------------------------------------
Revenues $43,340 $58,900
------- -------
Costs and Operating Expenses:
Cost of revenues 27,187 36,196
Selling, general, and administrative expenses 12,691 15,856
Research and development expenses 1,288 1,792
Restructuring and unusual costs (Note 5) 3,637 -
------- -------
44,803 53,844
------- -------
Operating Income (Loss) (1,463) 5,056
Interest Income 655 2,141
Interest Expense (1,429) (1,873)
------- -------
Income (Loss) Before Income Taxes, Minority Interest,
and Extraordinary Item (2,237) 5,324
Benefit (Provision) for Income Taxes 850 (2,219)
Minority Interest Income (Expense) (1) 24
------- -------
Income (Loss) Before Extraordinary Item (1,388) 3,129
Extraordinary Item (net of income taxes of $18; Note 6) 29 -
------- -------
Net Income (Loss) $(1,359) $ 3,129
======= =======
Basic and Diluted Earnings (Loss) per Share Before
Extraordinary Item $ (.11) $ .25
======= =======
Basic and Diluted Earnings (Loss) per Share (Note 3) $ (.11) $ .25
======= =======
Weighted Average Shares (Note 3):
Basic 12,239 12,277
======= =======
Diluted 12,239 12,290
======= =======
The accompanying notes are an integral part of these consolidated financial statements.
4
KADANT INC.
Consolidated Statement of Cash Flows
(Unaudited)
Three Months Ended
------------------------------
March 30, March 31,
(In thousands) 2002 2001
- --------------------------------------------------------------------------------------------------------------------------------
Operating Activities:
Net income (loss) $ (1,359) $ 3,129
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Noncash restructuring and unusual costs (Note 5) 2,441 -
Extraordinary item (Note 6) (29) -
Depreciation and amortization 1,342 2,381
Provision for losses on accounts receivable - 1,295
Minority interest (income) expense 1 (24)
Other noncash items 170 (1)
Changes in current accounts:
Accounts receivable 3,315 304
Unbilled contract costs and fees 3,918 1,243
Inventories 3,116 (3,471)
Other current assets (1,849) (1,991)
Accounts payable (3,073) 2,848
Other current liabilities (4,747) (3,602)
-------- --------
Net cash provided by operating activities 3,246 2,111
-------- --------
Investing Activities:
Acquisition of minority interest in subsidiary (1,364) -
Purchases of available-for-sale investments (1,615) -
Proceeds from maturities of available-for-sale investments - 67,028
Advances to former affiliates, net - 1,890
Purchases of property, plant, and equipment (595) (1,178)
Proceeds from repayments of note receivable 200 600
Other, net (161) (334)
-------- --------
Net cash provided by (used in) investing activities (3,535) 68,006
-------- --------
Financing Activities:
Repurchases of Company subordinated convertible
debentures (Note 6) (2,806) -
Acquisition of subsidiary common stock (1,461) -
Net proceeds from issuance of Company and subsidiary
common stock 469 20
Repayments of long-term obligations (192) (182)
-------- --------
Net cash used in financing activities $ (3,990) $ (162)
-------- --------
5
KADANT INC.
Consolidated Statement of Cash Flows (continued)
(Unaudited)
Three Months Ended
------------------------------
March 30, March 31,
(In thousands) 2002 2001
- --------------------------------------------------------------------------------------------------------------------------------
Exchange Rate Effect on Cash $ (243) $ 1,178
-------- --------
Increase (Decrease) in Cash and Cash Equivalents (4,522) 71,133
Cash and Cash Equivalents at Beginning of Period 102,807 62,461
-------- --------
Cash and Cash Equivalents at End of Period $ 98,285 $133,594
======== ========
Noncash Activities:
Amounts forgiven in exchange for the acquisition of 49%
minority interest in Kadant Composites Inc. $ - $ 2,053
======== ========
The accompanying notes are an integral part of these consolidated financial statements.
6
KADANT INC.
Notes to Consolidated Financial Statements
1. General
The interim consolidated financial statements presented have been
prepared by Kadant Inc. (also referred to in this document as "we" or "the
Company") 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 March 30, 2002, and the results of operations and cash
flows for the three-month periods ended March 30, 2002, and March 31, 2001.
Interim results are not necessarily indicative of results for a full year.
The consolidated balance sheet presented as of December 29, 2001, 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 29,
2001, as amended, filed with the Securities and Exchange Commission.
2. Comprehensive Income (Loss)
Comprehensive income (loss) combines net income (loss) 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. The Company had a comprehensive loss of $2,022,000
in the first quarter of 2002 and comprehensive income of $4,034,000 in the first
quarter of 2001.
3. Earnings (Loss) per Share
Basic and diluted earnings (loss) per share were calculated as follows:
Three Months Ended
----------------------------
March 30, March 31,
(In thousands except per share amounts) 2002 2001
- --------------------------------------------------------------------------------------------------------------------------------
Basic
Income (Loss) Before Extraordinary Item $(1,388) $ 3,129
Extraordinary Item (net of income taxes of $18) 29 -
------- -------
Net Income (Loss) $(1,359) $ 3,129
------- -------
Weighted Average Shares 12,239 12,277
------- -------
Basic Earnings (Loss) per Share:
Income (Loss) Before Extraordinary Item $ (.11) $ .25
Extraordinary Item - -
------- -------
$ (.11) $ .25
======= =======
7
KADANT INC.
3. Earnings (Loss) per Share (continued)
Three Months Ended
----------------------------
March 30, March 31,
(In thousands except per share amounts) 2002 2001
- --------------------------------------------------------------------------------------------------------------------------------
Diluted
Income (Loss) Before Extraordinary Item $(1,388) $ 3,129
Extraordinary Item (net of income taxes of $18) 29 -
------- -------
Net Income (Loss) $(1,359) $ 3,129
------- -------
Weighted Average Shares 12,239 12,277
Effect of Stock Options - 13
------- -------
Weighted Average Shares, as Adjusted 12,239 12,290
------- -------
Diluted Earnings (Loss) per Share:
Income (Loss) Before Extraordinary Item $ (.11) $ .25
Extraordinary Item - -
------- -------
$ (.11) $ .25
======= =======
Options to purchase 2,473,600 and 430,400 shares of common stock for the first quarter of 2002 and 2001,respectively, were
not included in the computation of diluted earnings (loss) 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.
In addition, the computation of diluted earnings (loss) per share for each period excludes the effect of assuming the
conversion of the Company's 4 1/2% subordinated convertible debentures, convertible at $60.50 per share, because the effect
would be antidilutive.
4. Business Segment Information
Three Months Ended
----------------------------
March 30, March 31,
(In thousands) 2002 2001
- --------------------------------------------------------------------------------------------------------------------------------
Revenues:
Pulp and Papermaking Equipment and Systems $40,577 $55,987
Composite and Fiber-based Products 2,763 2,913
------- -------
$43,340 $58,900
======= =======
8
KADANT INC.
4. Business Segment Information (continued)
Three Months Ended
----------------------------
March 30, March 31,
(In thousands) 2002 2001
- --------------------------------------------------------------------------------------------------------------------------------
Income (Loss) Before Income Taxes, Minority Interest, and
Extraordinary Item (a):
Pulp and Papermaking Equipment and Systems (b) $ 1,883 $ 6,979
Composite and Fiber-based Products (c) (d) (2,473) (983)
Corporate (e) (873) (940)
------- -------
Total Operating Income (Loss) (1,463) 5,056
Interest Income (Expense), Net (774) 268
------- -------
$(2,237) $ 5,324
======= =======
Capital Expenditures:
Pulp and Papermaking Equipment and Systems $ 332 $ 384
Composite and Fiber-based Products 263 794
------- -------
$ 595 $ 1,178
======= =======
(a) Excluding restructuring and unusual costs of $3,637,000, consolidated operating income was $2,174,000 in the 2002 period.
Includes consolidated goodwill amortization of $864,000 in the 2001 period.
(b) Excluding restructuring and unusual costs of $1,998,000, operating income was $3,881,000 in the 2002 period. Includes
goodwill amortization of $806,000 in the 2001 period.
(c) Excluding restructuring and unusual costs of $1,639,000, operating loss was $834,000 in the 2002 period. Includes goodwill
amortization of $58,000 in the 2001 period.
(d) Includes operating losses from the composite building products business of $1,054,000, excluding restructuring and unusual
costs in the 2002 period, and $584,000 in the 2001 period.
(e) Primarily general and administrative expenses.
5. Restructuring and Unusual Costs
During the first quarter of 2002, the Company recorded restructuring and
unusual costs of $3,637,000. Restructuring costs of $1,028,000, which were
accounted for in accordance with Emerging Issues Task Force Issue No. 94-3,
related to severance costs for 62 employees across all functions primarily at
the Company's Pulp and Papermaking Equipment and Systems segment, 50 of whom
have been terminated as of March 30, 2002. These actions were taken in an effort
to improve profitability and were in response to a continued weak market
environment and reduced demand. Unusual items of $2,609,000 include noncash
charges of $2,441,000 for asset writedowns, consisting of $953,000 for the
impairment of a laboratory in Ohio held for sale at the Papermaking Equipment
segment, and $1,488,000 for the writedown of fixed assets held for sale at the
Composite and Fiber-based Products segment; and $168,000 for related disposal
and facility-closure costs.
9
KADANT INC.
5. Restructuring and Unusual Costs (continued)
A summary of the changes in accrued restructuring costs, which are
included in other accrued expenses in the accompanying consolidated balance
sheet, follows:
(In thousands) Severance
- -----------------------------------------------------------------------------------------------
Balance at December 29, 2001 $ 56
Provision 1,028
Usage (555)
-------
Balance at March 30, 2002 $ 529
=======
The Company expects to pay the remaining accrued restructuring costs
primarily during the remainder of 2002.
6. Extraordinary Item
During the first quarter of 2002, the Company repurchased $2,875,000
principal amount of its 4 1/2% subordinated convertible debentures for
$2,806,000 in cash, resulting in an extraordinary gain of $29,000, net of
deferred debt charges and net of income tax provision of $18,000. As of March
30, 2002, $115,263,000 principal amount of the debentures remained outstanding.
Subsequent to March 30, 2002, the Company repurchased $21,522,000 principal
amount of the debentures for $21,043,000 in cash, resulting in an extraordinary
gain of $204,000, net of deferred debt charges and net of income tax provision
of $125,000.
7. Recent Accounting Pronouncements
"Business Combinations" and "Goodwill and Other Intangible Assets"
- ------------------------------------------------------------------
In July 2001, the Financial Accounting Standards Board (FASB) released
for issuance Statement of Financial Accounting Standards (SFAS) No. 141,
"Business Combinations" and SFAS No. 142, "Goodwill and Other Intangible
Assets." SFAS No. 141 requires the use of the purchase method of accounting and
prohibits the use of the pooling-of-interests method of accounting for business
combinations initiated after June 30, 2001. SFAS No. 141 also requires that the
Company recognize acquired intangible assets apart from goodwill if the acquired
intangible assets meet certain criteria. It also requires, upon adoption of SFAS
No. 142, that the Company reclassify the carrying amounts of intangible assets
and goodwill based on the criteria in SFAS No. 141. SFAS No. 142 requires, among
other things, that the Company no longer amortize goodwill, but instead test
goodwill for impairment at least annually. In addition, SFAS No. 142 requires
that the Company identify reporting units for the purpose of assessing potential
future impairments of goodwill, reassess the useful lives of other existing
recognized intangible assets, and cease amortization of intangible assets with
indefinite useful lives. An intangible asset with an indefinite useful life is
to be tested for impairment in accordance with the guidelines in SFAS No. 142.
SFAS No. 142 is required to be applied for fiscal years beginning after December
15, 2001, to all goodwill and other intangible assets recorded at that date,
regardless of when those assets were initially recognized. SFAS No. 142 requires
the Company to complete a transitional goodwill impairment test within six
months from the date of adoption. Amortization of goodwill in the first quarter
of 2001 was $864,000 on a pretax basis, and $577,000 on an after-tax basis, or
approximately $.05 per diluted share. Amortization of goodwill in 2001 was
$3,447,000 on a pretax basis, and $2,340,000 on an after-tax basis, or
approximately $.19 per diluted share. The Company is evaluating the impact of
the new impairment standards and has not yet determined the effect, if any, of
adoption on its financial statements.
10
KADANT INC.
Item 2 - Management's Discussion and Analysis of Financial Condition and Results
of Operations
- --------------------------------------------------------------------------------
Throughout this Management's Discussion and Analysis of Financial
Condition and Results of Operations, we make forward-looking statements, which
are statements concerning possible or assumed future results of operations. When
we use words such as "believes," "expects," "anticipates," "intends," "plans,"
"estimates," "should," "likely," "will," or similar expressions, we are making
forward-looking statements. Forward-looking statements are not guarantees of
performance. They involve risks, uncertainties, and assumptions and are based on
the beliefs and assumptions of our management, using information currently
available to our management. 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. 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
"Forward-looking Statements' in Exhibit 13 to our Annual Report on Form 10-K for
the fiscal year ended December 29, 2001, as amended, filed with the Securities
and Exchange Commission.
Overview
Company Background
Kadant operates 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. Our principal products
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 draining, purifying, and recycling
process water. 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 higher-margin spare parts and
consumables business, which we believe is less susceptible to the cyclical
trends in the paper industry.
Through the Composite and Fiber-based Products segment, we manufacture
and sell agricultural carriers derived from cellulose fiber and develop,
manufacture, and market fiber-based composite products for the building
industry.
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. In November 1992, we conducted an initial public
offering of our common stock 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.
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.
11
KADANT INC.
Overview (continued)
Composite and Fiber-based Products Segment
Our Composite and Fiber-based Products segment consists of two product
lines: our fiber-based granular products and our composite building products. We
employ patented technology to produce biodegradable absorbing granules from
papermaking byproducts. These granules are primarily used as agricultural
carriers. In our composite building products business, we develop, produce, and
market fiber-based composite products, primarily for the building industry, used
for applications such as decking and roof tiles.
In January 2001, we acquired the remaining 49% equity interest that we
did not already own in Kadant Composites Inc., which is responsible for our
composite building products business. We manufacture our composite building
products in Green Bay, Wisconsin.
International Sales
During 2001, approximately 55% 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
hedge transactions principally denominated in U.S. dollars.
Critical Accounting Policies
The discussion and analysis of our financial condition and results of
operations are based upon our 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
"Critical Accounting Policies" in Exhibit 13 to our Annual Report on Form 10-K
for the fiscal year ended December 29, 2001, as amended, filed with the
Securities and Exchange Commission. There have been no material changes since
year-end 2001 that warrant further disclosure.
Industry and Business Outlook
Our products are primarily sold to the pulp and paper industry. The paper
industry has been in a prolonged downcycle, characterized by weak 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 and maintenance programs when they perceive
weakness in their markets, has adversely affected our business. Over the long
term, as the markets recover, we expect that the consolidation in the paper
industry and the 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.
12
KADANT INC.
Overview (continued)
There has been a significant amount of papermaking downtime in the pulp
and paper industry in 2001 and in the first quarter of 2002. This, coupled with
weakened conditions in the world economy has produced a difficult market
environment. Our financial performance in the first quarter of 2002 was
adversely affected by weak bookings in the fourth quarter of 2001 and the
prolonged pulp and paper industry downcycle. We anticipate gradual improvement
in our bookings rates throughout 2002, as evidenced by an increase of 14% in
bookings in the first quarter of 2002 compared with the fourth quarter of 2001.
We continue to focus our efforts on managing our operating costs, capital
expenditures, and working capital. We have reaffirmed our previous guidance and
earnings estimates of $.14 to $.17 per diluted share on revenues of $43 to $45
million in the second quarter of 2002. Although startups are difficult to
forecast, we believe the composite building products business will generate
approximately $1.5 million of revenues in the second quarter of 2002, up from
$1.0 million in the first quarter of 2002, and we continue to expect $4 to $6
million of revenues from this business in 2002. Excluding restructuring and
unusual costs (Note 5), we expect earnings for the year to be $.70 to $.80 per
diluted share on revenues of $185 to $195 million, as stated previously. The
earnings estimate for 2002 includes the favorable effect of ceasing goodwill
amortization of approximately $.19 per diluted share resulting from the adoption
of SFAS No. 142, but excludes the possible unfavorable effect of impairment
charges resulting from the adoption of SFAS No. 142 (Note 7).
In October 2001, we terminated for nonperformance a distributor's
exclusive rights to market and sell certain of our composite building products
in exchange for minimum purchase commitments. We are now building and expanding
our distribution network for composite building products and have begun a
program of advertising in trade magazines, in-store promotions, and exhibiting
at trade and home shows. We now have twelve distribution centers throughout the
U.S. for our products. 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,
especially in light of the phase-out of widely used pressure-treated lumber that
contains potentially harmful chemicals.
Results of Operations
First Quarter 2002 Compared With First Quarter 2001
- ---------------------------------------------------
Revenues
Revenues decreased to $43.3 million in the first quarter of 2002 from
$58.9 million in the first quarter of 2001. Excluding the unfavorable effects of
currency translation in 2002 of $0.6 million due to a stronger U.S. dollar
relative to the functional currencies in countries in which we operate, revenues
in 2002 decreased by $15.0 million, or 25%.
Pulp and Papermaking Equipment and Systems Segment. Excluding the effect
of currency translation, revenues in the Papermaking Equipment segment decreased
$14.8 million, or 26%, in the first quarter of 2002. Revenues from the
Papermaking Equipment segment's stock-preparation equipment product line
decreased $10.2 million primarily as a result of a decrease in sales in North
America and Europe due to adverse market conditions and, to a lesser extent, a
decrease in export sales to China. Revenues from the segment's water-management
and accessories product lines decreased $3.1 million and $1.5 million,
respectively, primarily as a result of a decrease in demand in North America.
Composite and Fiber-based Products Segment. The Composite and Fiber-based
Products segment revenues decreased $0.2 million, primarily as a result of a
decrease in revenues at its fiber-based granular products business due to a
decrease in demand from one of our largest agricultural carrier customers,
slightly offset by an increase in sales of our composite building products.
13
KADANT INC.
First Quarter 2002 Compared With First Quarter 2001 (continued)
- ---------------------------------------------------
Gross Profit Margin
Gross profit margin decreased to 37% in the first quarter of 2002 from
39% in the first quarter of 2001. The gross profit margin at the Papermaking
Equipment segment decreased to 38.7% in 2002 from 39.8% in 2001 primarily due to
the lower revenues and the resulting underabsorbed overhead costs. The gross
profit margin at the Composite and Fiber-based Products segment increased to 16%
in 2002 from 14% in 2001 primarily due to a decrease of $0.3 million in the cost
of natural gas used in the production of fiber-based granules, offset in part by
increased negative gross margins as a result of startup efforts at our composite
building products business.
Other Operating Expenses
Selling, general, and administrative expenses as a percentage of revenues
increased to 29% in the first quarter of 2002 from 27% in the first quarter of
2001 due to the lower revenues. Selling, general, and administrative expenses
decreased to $12.7 million in 2002 from $15.9 million in 2001 primarily due to
cost-reduction efforts at the Papermaking Equipment segment.
Research and development expenses as a percentage of revenues were 3% in
both periods. Research and development expenses decreased to $1.3 million in the
first quarter of 2002 compared with $1.8 million in the first quarter of 2001,
primarily at the Papermaking Equipment segment.
Restructuring and Unusual Costs
During the first quarter of 2002, the Company recorded restructuring and
unusual costs of $3.6 million. Restructuring costs of $1.0 million, which were
accounted for in accordance with Emerging Issues Task Force Issue No. 94-3,
related to severance costs for 62 employees across all functions primarily at
the Company's Papermaking Equipment segment, 50 of whom have been terminated as
of March 30, 2002. These actions were taken in an effort to improve
profitability and were in response to a continued weak market environment and
reduced demand. Unusual items of $2.6 million include noncash charges of $2.4
million for asset writedowns, consisting of $1.0 million for the impairment of a
laboratory in Ohio held for sale at the Papermaking Equipment segment, and $1.4
million for the writedown of fixed assets held for sale at the Composite and
Fiber-based Products segment; and $0.2 million for related disposal and
facility-closure costs (Note 5).
Operating Income (Loss)
Operating losses were $1.5 million in the first quarter of 2002 compared
with operating income of $5.1 million in the first quarter of 2001. Excluding
restructuring and unusual costs in 2002, operating income at the Papermaking
Equipment segment decreased to $3.9 million in 2002 from $7.0 million in 2001.
Excluding restructuring and unusual costs in 2002, operating losses at the
Composite and Fiber-based Products segment decreased to $0.8 million in 2002
from $1.0 million in 2001. Operating losses from the composite building products
business, excluding restructuring and unusual costs, were $1.1 million and $0.6
million in the first quarters of 2002 and 2001, respectively.
Interest Income and Expense
Interest income decreased to $0.7 million in the first quarter of 2002
from $2.1 million in the first quarter of 2001. Of the total decrease in
interest income in 2002, approximately $1.0 million was due to lower prevailing
interest rates, and $0.5 million was due to lower average invested balances. The
decrease in average invested balances primarily related to repurchases of our
subordinated convertible debentures in late 2001 and in the first quarter of
2002 (Note 6), the redemption in September 2001 of our Thermo Fibergen
subsidiary's common stock, and to a lesser extent, consideration paid to Thermo
Fibergen shareholders for the acquisition of its minority interest. Interest
expense decreased to $1.4 million in the first quarter of 2002 from $1.9 million
in the first quarter of 2001, as a result of repurchases of our subordinated
convertible debentures.
14
KADANT INC.
First Quarter 2002 Compared With First Quarter 2001 (continued)
- ---------------------------------------------------
Income Taxes
The effective tax rate was 38% in the first quarter of 2002 and 42% in
the first quarter of 2001. The effective tax rates exceeded the statutory
federal income tax rate primarily due to the impact of state income taxes and
nondeductible expenses. The effective tax rate decreased in 2002 as a result of
the elimination of goodwill amortization, including nondeductible goodwill,
under SFAS No. 142 (Note 7) and various tax planning initiatives.
Minority Interest
Minority interest income (expense) in the first quarters of 2002 and 2001
represents the minority investors' share of earnings or losses in our
majority-owned subsidiaries.
Extraordinary Item
During the first quarter of 2002, we repurchased $2.9 million principal
amount of our 4 1/2% subordinated convertible debentures for $2.8 million in
cash, resulting in an extraordinary gain of $29,000, net of deferred debt
charges and net of income tax provision of $18,000 (Note 6).
Liquidity and Capital Resources
Consolidated working capital was $157.6 million at March 30, 2002,
compared with $159.4 million at December 29, 2001. Included in working capital
are cash, cash equivalents, and available-for-sale investments of $116.5 million
at March 30, 2002, compared with $119.4 million at December 29, 2001. Of the
total cash, cash equivalents, and available-for-sale investments at March 30,
2002, $7.5 million was held by our majority-owned Fiberprep Inc. subsidiary, and
the remainder was held by us and our wholly owned subsidiaries. At March 30,
2002, $51.3 million of our cash, cash equivalents, and available-for-sale
investments was held by our foreign subsidiaries.
During the first quarter of 2002, cash of $3.2 million was provided by
operating activities compared with $2.1 million in the first quarter of 2001. A
decrease in accounts receivable and unbilled contract costs and fees provided
cash of $3.3 million and $3.9 million, respectively, primarily at the
Papermaking Equipment segment due to improved collection efforts and the timing
of billings and receipt of payments. In addition, a decrease in inventories
provided cash of $3.1 million, primarily at the Papermaking Equipment segment as
a result of our efforts to match inventory levels with demand. A decrease in
accounts payable used cash of $3.1 million primarily in the Papermaking
Equipment segment due to the timing of payments. In addition, a use of cash of
$4.7 million resulted from a decrease in other accrued liabilities, primarily
accrued interest, accrued payroll and employee benefits, and to a lesser extent,
accrued income taxes.
Our investing activities, excluding available-for-sale investments and
advances to former affiliates activity, used $1.9 million of cash in the first
quarter of 2002, compared with $0.9 million in the first quarter of 2001. During
the first quarter of 2002, we purchased property, plant, and equipment for $0.6
million, including $0.3 million at the Composite and Fiber-based Products
segment, the effects of which were offset in part by the collection of $0.2
million from a note receivable related to the September 2000 sale of a
fiber-recovery and water-clarification services plant. In addition, we paid $1.4
million in connection with the acquisition of the minority interest of our
Thermo Fibergen subsidiary.
Our financing activities used cash of $4.0 million in the first quarter
of 2002, compared with $0.2 million in the first quarter of 2001. During the
first quarter of 2002, we used $2.8 million to fund the repurchase of our
subordinated convertible debentures (Note 6), as well as $0.2 million to fund
the payment of long-term obligations. In addition, we also paid $1.5 million in
connection with the acquisition of common stock of our Thermo Fibergen
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KADANT INC.
Liquidity and Capital Resources (continued)
subsidiary. These uses of cash were offset in part by $0.5 million of cash
provided by the issuance of our subsidiary's 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
March 30, 2002, we had $13.1 million remaining under this authorization. In
April 2002, our board of directors authorized the repurchase, through
April 9, 2003, of up to an additional $50 million of our debt and equity
securities in the open market or in negotiated transactions. Subsequent to
March 30, 2002, we repurchased an additional $21.0 million of our subordinated
convertible debentures.
At March 30, 2002, we had $81.8 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 our spinoff from Thermo Electron,
our former parent company, we intend to issue equity in the range of 10 to 20
percent of our outstanding common stock to the public within one year of the
spinoff to support our current business plan, which includes repayments of debt,
acquisitions, creation of strategic partnerships, and investments in our core
papermaking equipment business and composite building products business.
Our net debt (calculated as total short- and long-term debt and common
stock of subsidiary subject to redemption, less cash, cash equivalents, and
available-for-sale investments) was $0.2 million at March 30, 2002, compared
with $0.4 million at December 29, 2001.
During the remainder of 2002, we plan to make expenditures for property,
plant, and equipment of approximately $2.4 million. Our ability to use our cash
and to incur additional debt is limited by financial covenants in our
distribution agreement with Thermo Electron. These financial covenants, as
amended, require that (1) the ratio of our net indebtedness to net
capitalization not exceed 40% and (2) on a rolling four quarter basis, that 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,
be at least four times greater than interest expense. In instances where our net
indebtedness to net capitalization is less than or equal to 20% for any
measurement date, the coverage ratio of four times greater than interest expense
is lowered to three times greater than interest expense. As of March 30, 2002,
we were in compliance with all the financial covenants of the agreement, as
amended. If we are unable to comply with the financial covenants, Thermo
Electron could require us to refinance our debentures, conduct an exchange offer
for the debentures, or repay in full the underlying obligation. If we were
required to take these actions, we might not have sufficient cash or credit
capacity to engage in transactions, such as a significant acquisition, that
might otherwise benefit our business. These circumstances could also impair our
ability to continue to engage in transactions that have been integral to
historical operations. 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 2001.
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KADANT INC.
PART II - OTHER INFORMATION
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
None.
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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 10th day of May 2002.
KADANT INC.
/s/ Thomas M. O'Brien
----------------------------------------------------
Thomas M. O'Brien
Executive Vice President and Chief Financial Officer
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KADANT INC.
EXHIBIT INDEX
Exhibit
Number Description of Exhibit
- --------------------------------------------------------------------------------
10 Directors Restricted Stock Plan
19