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 June 29, 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 July 26, 2002
---------------------------- ----------------------------
Common Stock, $.01 par value 13,546,952
PART I - Financial Information
Item 1 - Financial Statements
- -----------------------------
KADANT INC.
Consolidated Balance Sheet
(Unaudited)
Assets
June 29, December 29,
(In thousands) 2002 2001
- --------------------------------------------------------------------------------------------------------------------------------
Current Assets:
Cash and cash equivalents $ 99,302 $102,807
Available-for-sale investments, at quoted market value (amortized cost
of $19,268 and $16,625) 19,268 16,625
Accounts receivable, less allowances of $2,682 and $2,515 27,678 39,178
Unbilled contract costs and fees 9,672 10,126
Inventories:
Raw materials and supplies 14,021 13,625
Work in process 5,476 6,962
Finished goods (includes $1,457 and $1,917 at customer locations) 11,902 12,947
Deferred tax asset 8,266 6,991
Other current assets 3,136 3,198
-------- --------
198,721 212,459
-------- --------
Property, Plant, and Equipment, at Cost 69,902 71,710
Less: Accumulated depreciation and amortization 44,383 43,225
-------- --------
25,519 28,485
-------- --------
Other Assets 9,626 10,441
-------- --------
Goodwill (Note 7) 117,133 116,269
-------- --------
$350,999 $367,654
======== ========
2
KADANT INC.
Consolidated Balance Sheet (continued)
(Unaudited)
Liabilities and Shareholders' Investment
June 29, December 29,
(In thousands except share amounts) 2002 2001
- --------------------------------------------------------------------------------------------------------------------------------
Current Liabilities:
Current maturities of long-term obligations $ 585 $ 573
Accounts payable 16,683 18,661
Accrued payroll and employee benefits 7,274 7,990
Accrued warranty costs 3,534 4,598
Customer deposits 3,001 3,070
Accrued merger consideration - 2,824
Other accrued expenses (Note 5) 12,840 15,360
-------- --------
43,917 53,076
-------- --------
Deferred Income Taxes and Other Deferred Items 11,486 11,457
-------- --------
Long-term Obligations:
Subordinated convertible debentures (Note 6) 88,276 118,138
Notes payable 580 1,129
-------- --------
88,856 119,267
-------- --------
Minority Interest 299 297
-------- --------
Shareholders' Investment:
Preferred stock, $.01 par value, 5,000,000 shares authorized;
none issued - -
Common stock, $.01 par value, 150,000,000 shares authorized;
14,045,550 and 12,745,165 shares issued (Note 8) 140 127
Capital in excess of par value (Note 8) 98,657 81,229
Retained earnings 144,694 143,504
Treasury stock at cost, 498,598 and 505,146 shares (21,042) (21,345)
Deferred compensation (80) (5)
Accumulated other comprehensive items (Note 2) (15,928) (19,953)
-------- --------
206,441 183,557
-------- --------
$350,999 $367,654
======== ========
The accompanying notes are an integral part of these consolidated financial statements.
3
KADANT INC.
Consolidated Statement of Income
(Unaudited)
Three Months Ended
-----------------------------
June 29, June 30,
(In thousands except per share amounts) 2002 2001
- -------------------------------------------------------------------------------------------------------------------------------
Revenues $46,378 $56,732
------- -------
Costs and Operating Expenses:
Cost of revenues 28,378 36,084
Selling, general, and administrative expenses 12,576 14,585
Research and development expenses 1,152 1,871
------- -------
42,106 52,540
------- -------
Operating Income 4,272 4,192
Interest Income 623 1,812
Interest Expense (1,207) (1,871)
------- -------
Income Before Provision for Income Taxes, Minority Interest, and
Extraordinary Item 3,688 4,133
Provision for Income Taxes 1,395 1,736
Minority Interest (Income) Expense 1 (50)
------- -------
Income Before Extraordinary Item 2,292 2,447
Extraordinary Item (net of income taxes of $157; Note 6) 257 -
------- -------
Net Income $ 2,549 $ 2,447
======= =======
Basic and Diluted Earnings per Share Before Extraordinary Item $ .18 $ .20
======= =======
Basic and Diluted Earnings per Share (Note 3) $ .20 $ .20
======= =======
Weighted Average Shares (Note 3):
Basic 12,446 12,277
======= =======
Diluted 12,661 12,294
======= ========
The accompanying notes are an integral part of these consolidated financial statements.
4
KADANT INC.
Consolidated Statement of Income
(Unaudited)
Six Months Ended
-----------------------------
June 29, June 30,
(In thousands except per share amounts) 2002 2001
- -------------------------------------------------------------------------------------------------------------------------------
Revenues $89,718 $115,632
------- --------
Costs and Operating Expenses:
Cost of revenues 55,565 72,280
Selling, general, and administrative expenses 25,267 30,441
Research and development expenses 2,440 3,663
Restructuring and unusual costs (Note 5) 3,637 -
------- --------
86,909 106,384
------- --------
Operating Income 2,809 9,248
Interest Income 1,278 3,953
Interest Expense (2,636) (3,744)
------- --------
Income Before Provision for Income Taxes, Minority Interest, and
Extraordinary Item 1,451 9,457
Provision for Income Taxes 545 3,955
Minority Interest (Income) Expense 2 (74)
------- --------
Income Before Extraordinary Item 904 5,576
Extraordinary Item (net of income taxes of $175; Note 6) 286 -
------- --------
Net Income $ 1,190 $ 5,576
======= ========
Basic and Diluted Earnings per Share Before Extraordinary Item $ .07 $ .45
======= ========
Basic and Diluted Earnings per Share (Note 3) $ .10 $ .45
======= ========
Weighted Average Shares (Note 3):
Basic 12,343 12,277
======= ========
Diluted 12,508 12,292
======= ========
The accompanying notes are an integral part of these consolidated financial statements.
5
KADANT INC.
Consolidated Statement of Cash Flows
(Unaudited)
Six Months Ended
-----------------------------
June 29, June 30,
(In thousands) 2002 2001
- --------------------------------------------------------------------------------------------------------------------------------
Operating Activities:
Net income $ 1,190 $ 5,576
Adjustments to reconcile net income to net cash provided by
operating activities:
Noncash restructuring and unusual costs (Note 5) 2,441 -
Extraordinary item (Note 6) (286) -
Depreciation and amortization 2,587 4,720
Provision for losses on accounts receivable 129 635
Minority interest (income) expense 2 (74)
Other noncash items 344 (190)
Changes in current accounts:
Accounts receivable 11,423 7,674
Unbilled contract costs and fees 703 (1,362)
Inventories 2,650 (3,446)
Other current assets (1,255) (2,705)
Accounts payable (2,373) 2,535
Other current liabilities (4,938) (65)
-------- --------
Net cash provided by operating activities 12,617 13,298
-------- --------
Investing Activities:
Acquisition of minority interest in subsidiary (1,364) -
Purchases of available-for-sale investments (2,643) -
Proceeds from maturities of available-for-sale investments - 68,671
Advances from former affiliates, net - 2,206
Purchases of property, plant, and equipment (1,348) (2,390)
Proceeds from repayments of note receivable 200 1,200
Other, net (209) 46
-------- --------
Net cash provided by (used in) investing activities (5,364) 69,733
-------- --------
Financing Activities:
Repurchases of Company subordinated convertible debentures (Note 6) (29,290) -
Net proceeds from issuance of Company common stock in public offering (Note 8) 17,648 -
Net proceeds from issuance of Company and subsidiary common stock 472 321
Acquisition of subsidiary common stock (1,461) -
Repayments of long-term obligations (537) (509)
-------- --------
Net cash used in financing activities $(13,168) $ (188)
-------- --------
6
KADANT INC.
Consolidated Statement of Cash Flows (continued)
(Unaudited)
Six Months Ended
-----------------------------
June 29, June 30,
(In thousands) 2002 2001
- --------------------------------------------------------------------------------------------------------------------------------
Exchange Rate Effect on Cash $ 2,410 $ 451
-------- --------
Increase (Decrease) in Cash and Cash Equivalents (3,505) 83,294
Cash and Cash Equivalents at Beginning of Period 102,807 62,461
-------- --------
Cash and Cash Equivalents at End of Period $ 99,302 $145,755
======== ========
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.
7
KADANT INC.
Notes to Consolidated Financial Statements
(Unaudited)
1. General
The interim consolidated financial statements and related notes presented
have been prepared by Kadant Inc. (also referred to in this document as "we,"
"Kadant," 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 June 29, 2002, and the results of
operations for the three- and six-month periods ended June 29, 2002, and June
30, 2001, and cash flows for the six-month periods ended June 29, 2002, and June
30, 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 former independent auditors. The consolidated financial
statements and related notes are presented as permitted by Form 10-Q and do not
contain certain information included in the annual financial statements and
related notes of the Company. The consolidated financial statements and notes
included herein should be read in conjunction with the financial statements and
related notes included in the Company's Annual Report on Form 10-K for the
fiscal year ended December 29, 2001, as amended, 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. During the second quarter of 2002 and 2001, the Company had
comprehensive income of $7,237,000 and $803,000, respectively. During the first
six months of 2002 and 2001, the Company had comprehensive income of $5,215,000
and $4,838,000, respectively.
3. Earnings per Share
Basic and diluted earnings per share were calculated as follows:
Three Months Ended Six Months Ended
------------------------ ------------------------
June 29, June 30, June 29, June 30,
(In thousands except per share amounts) 2002 2001 2002 2001
- --------------------------------------------------------------------------------------------------------------------------------
Basic
Income Before Extraordinary Item $ 2,292 $ 2,447 $ 904 $ 5,576
Extraordinary Item (net of income taxes of $157 and $175) 257 - 286 -
------- ------- ------- -------
Net Income $ 2,549 $ 2,447 $ 1,190 $ 5,576
------- ------- ------- -------
Weighted Average Shares 12,446 12,277 12,343 12,277
------- ------- ------- -------
Basic Earnings per Share:
Income Before Extraordinary Item $ .18 $ .20 $ .07 $ .45
Extraordinary Item .02 - .03 -
------- ------- ------- -------
$ .20 $ .20 $ .10 $ .45
======= ======= ======= =======
8
KADANT INC.
Notes to Consolidated Financial Statements
(Unaudited)
3. Earnings per Share (continued)
Three Months Ended Six Months Ended
------------------------ ------------------------
June 29, June 30, June 29, June 30,
(In thousands except per share amounts) 2002 2001 2002 2001
- ---------------------------------------------------------------------------------------------------------------------------------
Diluted
Income Before Extraordinary Item $ 2,292 $ 2,447 $ 904 $ 5,576
Extraordinary Item (net of income taxes of $157 and $175) 257 - 286 -
------- ------- ------- -------
Net Income $ 2,549 $ 2,447 $ 1,190 $ 5,576
------- ------- ------- -------
Weighted Average Shares 12,446 12,277 12,343 12,277
Effect of Stock Options 215 17 165 15
------- ------- ------- -------
Weighted Average Shares, as Adjusted 12,661 12,294 12,508 12,292
------- ------- ------- -------
Diluted Earnings per Share:
Income Before Extraordinary Item $ .18 $ .20 $ .07 $ .45
Extraordinary Item .02 - .03 -
------- ------- ------- -------
$ .20 $ .20 $ .10 $ .45
======= ======= ======= =======
Options to purchase approximately 439,200 and 401,400 shares of common
stock for the second quarters of 2002 and 2001, respectively, and 561,000 and
415,900 shares of common stock for the first six months of 2002 and 2001,
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 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 Six Months Ended
--------------------------- ---------------------------
June 29, June 30, June 29, June 30,
(In thousands) 2002 2001 2002 2001
- ---------------------------------------------------------------------------------------------------------------------------------
Revenues:
Pulp and Papermaking Equipment and Systems $41,923 $54,686 $82,500 $110,673
Composite and Fiber-based Products 4,455 2,046 7,218 4,959
------- ------- ------- --------
$46,378 $56,732 $89,718 $115,632
======= ======= ======= ========
9
KADANT INC.
Notes to Consolidated Financial Statements
(Unaudited)
4. Business Segment Information (continued)
Three Months Ended Six Months Ended
--------------------------- ---------------------------
June 29, June 30, June 29, June 30,
(In thousands) 2002 2001 2002 2001
- ---------------------------------------------------------------------------------------------------------------------------------
Income Before Provision for Income Taxes, Minority Interest,
and Extraordinary Item (a):
Pulp and Papermaking Equipment and Systems (b) $ 5,024 $ 6,404 $ 6,907 $13,383
Composite and Fiber-based Products (c) (d) 98 (1,253) (2,375) (2,236)
Corporate (e) (850) (959) (1,723) (1,899)
------- ------- ------- -------
Total Operating Income 4,272 4,192 2,809 9,248
Interest Income (Expense), Net (584) (59) (1,358) 209
------- ------- ------- -------
$ 3,688 $ 4,133 $ 1,451 $ 9,457
======= ======= ======= =======
Capital Expenditures:
Pulp and Papermaking Equipment and Systems $ 419 $ 348 $ 631 $ 732
Composite and Fiber-based Products 327 864 590 1,658
Corporate 7 - 127 -
------- ------- ------- -------
$ 753 $ 1,212 $ 1,348 $ 2,390
======= ======= ======= =======
(a) Excluding restructuring and unusual costs of $3,637, consolidated operating
income was $6,446 in the six-month period ended June 29, 2002. Includes
consolidated goodwill amortization of $862 and $1,726 in the three- and
six-month periods ended June 30, 2001, respectively.
(b) Excluding restructuring and unusual costs of $1,998, operating income was
$8,905 in the six-month period ended June 29, 2002. Includes goodwill
amortization of $803 and $1,609 in the three- and six-month periods ended
June 30, 2001, respectively.
(c) Excluding restructuring and unusual costs of $1,639, operating loss was
$736 in the six-month period ended June 29, 2002. Includes goodwill
amortization of $59 and $117 in the three- and six-month periods ended June
30, 2001, respectively.
(d) Includes operating losses from the composite building products business of
$677 and $1,054 in the three-month periods ended June 29, 2002 and June 30,
2001, respectively, and $1,731 and $1,638, excluding restructuring and
unusual charges, in the six-month periods ended June 29, 2002 and June 30,
2001, respectively.
(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 (Papermaking Equipment)
segment, 60 of whom were terminated as of June 29, 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 costs 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.
10
KADANT INC.
Notes to Consolidated Financial Statements
(Unaudited)
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 (830)
------
Balance at June 29, 2002 $ 254
======
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. During the
second quarter of 2002, the Company repurchased $26,987,000 principal amount of
these debentures for $26,385,000 in cash, resulting in an extraordinary gain of
$257,000, net of deferred debt charges, and net of income tax provision of
$157,000. In the first six months of 2002, the combined extraordinary gain
resulting from these transactions was $286,000, net of deferred debt charges,
and net of income tax provision of $175,000. As of June 29, 2002, $88,276,000
principal amount of the debentures remained outstanding.
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.
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 impairments of goodwill, reassess the useful
lives of other existing recognized intangible assets, and cease amortization of
intangible assets with indefinite useful lives. Intangible assets with
indefinite useful lives are to be tested for impairment in accordance with the
guidelines in SFAS No. 142. SFAS No. 142 is to be applied for fiscal years
beginning after December 15, 2001, to all goodwill and other intangible assets
recorded as of January 1, 2002, regardless of when those assets were initially
recognized. The Company is currently evaluating goodwill for impairment using
the two-step process as prescribed in SFAS No. 142. The first step is an initial
evaluation for potential impairment, while the second step measures the amount
of the impairment. The
11
KADANT INC.
Notes to Consolidated Financial Statements
(Unaudited)
7. Recent Accounting Pronouncements (continued)
Company completed the first step of the goodwill impairment test in the second
quarter of 2002. Having completed step one, the Company expects that a portion
of the goodwill related to both the Papermaking Equipment segment and the
Composite and Fiber-based Products segment may be impaired. The Company
currently has $112,957,000 and $4,176,000 of goodwill in the Papermaking
Equipment segment and the Composite and Fiber-based Products segment,
respectively. The Company has not yet determined the amount of the potential
impairment, but plans to complete the measurement of the impairment in the
second half of 2002. In accordance with the SFAS No. 142 transition procedures,
an impairment that is required to be recognized when adopting the standard will
be reflected as the cumulative effect of a change in accounting principle in the
first quarter of 2002.
Pro forma results as if SFAS No. 142 had been adopted at the beginning
of 2001 are as follows:
Three Months Ended Six Months Ended
(In thousands except per share amounts) June 30, 2001 June 30, 2001
- ---------------------------------------------------------------------------------------------------------------------------
Net Income, as Reported $2,447 $5,576
Add back: Goodwill Amortization 575 1,152
------ ------
Net Income, as Adjusted $3,022 $6,728
====== ======
Basic and Diluted Earnings per Share, as Reported $ .20 $ .45
Add back: Goodwill Amortization .05 .10
------ ------
Basic and Diluted Earnings per Share, as Adjusted $ .25 $ .55
====== ======
8. Public Offering of Common Stock
In June 2002, the Company sold 1,300,000 shares of its common stock in a
public offering at $14.62 per share, for net proceeds of $17,648,000.
Item 2 - Management's Discussion and Analysis of Financial Condition and Results
of Operations
- --------------------------------------------------------------------------------
Throughout this report on Form 10-Q, 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 this report on Form 10-Q. We
assume no obligation to update any such forward-looking statements.
12
KADANT INC.
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 of the world's paper
manufacturers. 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 than our capital
equipment business to the cyclical trends in the paper industry.
Through our 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 completed 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 consists of three primary product
lines: stock-preparation equipment, paper machine accessories, and
water-management systems. 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 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 and for home lawn and garden applications. 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 comprises our composite
building products business. We manufacture our composite building products in
Green Bay, Wisconsin.
13
KADANT INC.
Overview (continued)
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 seek to reduce our exposure to currency fluctuations
through the use of forward currency exchange contracts. We may enter into
forward contracts to hedge certain firm purchase and sale commitments
denominated in currencies other than our subsidiaries' functional currencies.
These contracts hedge transactions principally denominated in U.S. dollars.
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, except with respect to the
valuation of goodwill under Statement of Financial Accounting Standards (SFAS)
No. 142. The Company is currently evaluating goodwill for impairment using the
two-step process as prescribed in SFAS No. 142. The first step is an initial
evaluation for potential impairment, while the second step measures the amount
of the impairment. The Company completed the first step of the goodwill
impairment test in the second quarter of 2002. Having completed step one, the
Company expects that a portion of the goodwill related to both the Papermaking
Equipment segment and the Composite and Fiber-based Products segment may be
impaired. The Company has $113.0 million and $4.2 million of goodwill in the
Papermaking Equipment segment and the Composite and Fiber-based Products
segment, respectively. The Company has not yet determined the amount of the
potential impairment, but plans to complete the measurement of the impairment in
the second half of 2002. In accordance with SFAS No. 142 transition procedures,
an impairment that is required to be recognized when adopting the standard will
be reflected as the cumulative effect of a change in accounting principle in the
first quarter of 2002.
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 in response to market
weakness, 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, has adversely affected our business. Over the long term, as the
markets recover, we expect that consolidation in the paper industry and improved
capacity management will have a positive effect on paper companies' financial
performance and, in return, will be favorable to both paper companies and
suppliers, such as Kadant.
14
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 half of 2002. This, coupled with
weakened conditions in the world economy, has produced a difficult market
environment. We anticipate gradual improvement in the industry during the
remainder of 2002, as evidenced by improved operating rates and increasing pulp
prices. We continue to focus our efforts on managing our operating costs,
capital expenditures, and working capital. We expect earnings in the third
quarter of 2002 to be $.19 to $.21 per diluted share on revenues of $47 to $49
million. We are maintaining our guidance for the year and expect earnings per
share, excluding restructuring and unusual costs (Note 5) and adjusted for the
additional shares issued in our June stock offering (Note 8), to be $.66 to $.76
per diluted share on revenues of $185 to $195 million. The additional shares
issued in the offering have a dilutive effect of $.04 per share in the second
half of 2002. The earnings estimate for 2002 includes the favorable effect of
ceasing goodwill amortization ($.19 per diluted share in 2001) resulting from
the adoption of SFAS No. 142, but excludes other possible effects on earnings in
2002 resulting from the adoption of SFAS No. 142, which may include an
impairment charge to be determined in accordance with that standard (Note 7).
Although startups are difficult to forecast, we believe the composite building
products business will generate approximately $2.5 to $3.0 million of revenues
in the third quarter of 2002. We expect $8 to $9 million of revenues, with
operating losses (excluding restructuring and unusual costs) of $2.3 to $3.0
million, from this business in 2002.
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 are advertising in
trade magazines, conducting in-store promotions, and exhibiting at trade and
home shows. We now have fifteen 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 CCA pressure-treated lumber that contains
potentially harmful chemicals.
Results of Operations
Second Quarter 2002 Compared With Second Quarter 2001
- -----------------------------------------------------
Revenues
Revenues decreased to $46.4 million in the second quarter of 2002 from
$56.7 million in the second quarter of 2001. Excluding the unfavorable effects
of currency translation in 2002 of $0.1 million due to a stronger U.S. dollar
relative to the functional currencies in countries in which we operate, revenues
decreased by $10.2 million, or 18%.
Pulp and Papermaking Equipment and Systems Segment. Excluding the effect
of currency translation, revenues at the Papermaking Equipment segment decreased
by $12.7 million, or 23%, in the second quarter of 2002 compared with the second
quarter of 2001. Revenues from the Papermaking Equipment segment's
stock-preparation equipment product line decreased by $9.2 million in 2002
primarily as a result of decreases 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 accessories and water-management product
lines decreased by $2.2 million and $1.5 million in 2002, respectively,
primarily due to a decrease in demand in North America as a result of machine
shutdowns and mill closures caused by industry consolidation and capacity
rationalization.
Composite and Fiber-based Products Segment. The Composite and Fiber-based
Products segment revenues increased to $4.5 million in the second quarter of
2002 from $2.0 million in the second quarter of 2001 largely due to an increase
of $1.8 million in sales of our composite building products as demand has
increased with the expansion of our distribution channels. In addition, revenues
from our fiber-based granular products increased $0.6 million in 2002 primarily
due to the introduction of two new applications of our agricultural carrier
products.
15
KADANT INC.
Second Quarter 2002 Compared With Second Quarter 2001 (continued)
- -----------------------------------------------------
Gross Profit Margin
Gross profit margin increased to 39% in the second quarter of 2002 from
36% in the second quarter of 2001. The gross profit margin at the Papermaking
Equipment segment increased to 40% in 2002 from 37% in 2001 primarily due to a
change in product mix toward higher-margin aftermarket products. The gross
profit margin at the Composite and Fiber-based Products segment increased to 32%
in 2002 from 8% in 2001 primarily due to positive gross profit margins from our
composite building products compared to negative gross margins in 2001. In
addition, gross profit margins from our fiber-based granular products increased
primarily due to a decrease in 2002 in the cost of natural gas used in the
production process and, to a lesser extent, an increase in revenues resulting in
more cost absorption, and a more favorable product mix.
Other Operating Expenses
Selling, general, and administrative expenses as a percentage of revenues
increased to 27% in the second quarter of 2002 from 26% in the second quarter of
2001 due to lower revenues. Selling, general, and administrative expenses
decreased to $12.6 million in 2002 from $14.6 million in 2001 primarily due to
cost-reduction efforts at the Papermaking Equipment segment, as well as the
absence in 2002 of $0.9 million of goodwill amortization which was recorded in
2001.
Research and development expenses as a percentage of revenues were 2% in
the second quarter of 2002 compared with 3% in the second quarter of 2001.
Research and development expenses decreased to $1.2 million in the second
quarter of 2002 compared with $1.9 million in the second quarter of 2001,
primarily at the Papermaking Equipment segment.
Operating Income
Operating income was $4.3 million in the second quarter of 2002 compared
with $4.2 million in the second quarter of 2001. Operating income at the
Papermaking Equipment segment decreased to $5.0 million in 2002 from $7.2
million, excluding goodwill amortization, in 2001. Operating income at the
Composite and Fiber-based Products segment increased to $0.1 million in 2002
from an operating loss of $1.2 million, excluding goodwill amortization, in
2001. Operating losses from the composite building products business were $0.7
million and $1.1 million in the second quarters of 2002 and 2001, respectively.
Interest Income and Expense
Interest income decreased to $0.6 million in the second quarter of 2002
from $1.8 million in the second quarter of 2001. Of the total decrease in
interest income in 2002, approximately $0.7 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 relates to repurchases of our
subordinated convertible debentures (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 their
minority interest. Interest expense decreased to $1.2 million in the second
quarter of 2002 from $1.9 million in the second quarter of 2001, as a result of
repurchases of our subordinated convertible debentures.
Income Taxes
The effective tax rate was 38% in the second quarter of 2002 and 42% in
the second 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.
16
KADANT INC.
Second Quarter 2002 Compared With Second Quarter 2001 (continued)
- -----------------------------------------------------
Minority Interest
Minority interest (income) expense in the second quarters of 2002 and
2001 represents the minority investors' share of earnings or losses in our
majority-owned subsidiaries.
Extraordinary Item
During the second quarter of 2002, we repurchased $27.0 million principal
amount of our 4 1/2% subordinated convertible debentures for $26.4 million in
cash, resulting in an extraordinary gain of $257,000, net of deferred debt
charges, and net of income tax provision of $157,000 (Note 6).
First Six Months 2002 Compared With First Six Months 2001
- ---------------------------------------------------------
Revenues
Revenues decreased to $89.7 million in the first six months of 2002 from
$115.6 million in the first six months 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 decreased by $25.3 million, or 22%.
Pulp and Papermaking Equipment and Systems Segment. Excluding the effect
of currency translation, revenues in the Papermaking Equipment segment decreased
by $27.5 million, or 25%, in the first six months of 2002 compared with the
first six months of 2001. Revenues from the Papermaking Equipment segment's
stock-preparation equipment product line decreased by $19.4 million in 2002
primarily as a result of decreases 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 by $4.6 million and $3.7 million in 2002, respectively,
primarily due to a decrease in demand in North America as a result of machine
shutdowns and mill closures caused by industry consolidation and capacity
rationalization.
Composite and Fiber-based Products Segment. The Composite and Fiber-based
Products segment revenues increased to $7.2 million in the first six months of
2002 compared with $5.0 million in the first six months of 2001, primarily as a
result of an increase of $1.9 million in sales of our composite building
products as demand has increased with the expansion of our distribution
channels. In addition, revenues from our fiber-based granular products increased
$0.4 million primarily due to the introduction of two new applications of our
agricultural carrier products.
Gross Profit Margin
Gross profit margin increased to 38% in the first six months of 2002 from
37% in the first six months of 2001. The gross profit margin at the Papermaking
Equipment segment was 39% in both periods. The gross profit margin at the
Composite and Fiber-based Products segment increased to 26% in 2002 from 12% in
2001 primarily due to the reasons discussed in the results of operations for the
second quarter of 2002 compared with the second quarter of 2001.
Other Operating Expenses
Selling, general, and administrative expenses as a percentage of revenues
increased to 28% in the first six months of 2002 from 26% in the first six
months of 2001 due to lower revenues. Selling, general, and administrative
expenses decreased to $25.3 million in 2002 from $30.4 million in 2001 primarily
due to cost-reduction efforts at the Papermaking Equipment segment, as well as
the absence in 2002 of $1.7 million of goodwill amortization which was recorded
in 2001.
17
KADANT INC.
First Six Months 2002 Compared With First Six Months 2001 (continued)
- ---------------------------------------------------------
Research and development expenses as a percentage of revenues were 3% in
both periods. Research and development expenses decreased to $2.4 million in the
first six months of 2002 compared with $3.7 million in the first six months of
2001, primarily at the Papermaking Equipment segment partly due to the closure
of a redundant laboratory (Note 5).
Restructuring and Unusual Costs
During the first six months 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, 60 of whom were terminated as of
June 29, 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 costs 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
Operating income was $2.8 million in the first six months of 2002
compared with $9.2 million in the first six months of 2001. Excluding
restructuring and unusual costs in 2002 and goodwill amortization in 2001,
operating income at the Papermaking Equipment segment decreased to $8.9 million
in 2002 from $15.0 million in 2001. Excluding restructuring and unusual costs in
2002 and goodwill amortization in 2001, operating losses at the Composite and
Fiber-based Products segment decreased to $0.7 million in 2002 from $2.1 million
in 2001. Operating losses from the composite building products business,
excluding restructuring and unusual costs, were $1.7 million and $1.6 million in
the first six months of 2002 and 2001, respectively.
Interest Income and Expense
Interest income decreased to $1.3 million in the first six months of 2002
from $4.0 million in the first six months of 2001. Of the total decrease in
interest income in 2002, approximately $1.7 million was due to lower prevailing
interest rates, and $1.0 million was due to lower average invested balances. The
decrease in average invested balances primarily relates to repurchases of our
subordinated convertible debentures (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 their
minority interest. Interest expense decreased to $2.6 million in the first six
months of 2002 from $3.7 million in the first six months of 2001, as a result of
the repurchases of our subordinated convertible debentures.
Income Taxes
The effective tax rate was 38% in the first six months of 2002 and 42% in
the first six months 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 six months of 2002 and
2001 represents the minority investors' share of earnings or losses in our
majority-owned subsidiaries.
18
KADANT INC.
First Six Months 2002 Compared With First Six Months 2001 (continued)
- ---------------------------------------------------------
Extraordinary Item
During the first six months of 2002, we repurchased $29.9 million
principal amount of our 4 1/2% subordinated convertible debentures for $29.2
million in cash, resulting in an extraordinary gain of $286,000, net of deferred
debt charges, and net of income tax provision of $175,000 (Note 6).
Liquidity and Capital Resources
Consolidated working capital was $154.8 million at June 29, 2002,
compared with $159.4 million at December 29, 2001. Included in working capital
are cash, cash equivalents, and available-for-sale investments of $118.6 million
at June 29, 2002, compared with $119.4 million at December 29, 2001. Of the
total cash, cash equivalents, and available-for-sale investments at June 29,
2002, $7.6 million was held by a majority-owned subsidiary, and the remainder
was held by us and our wholly owned subsidiaries. At June 29, 2002, $54.7
million of cash, cash equivalents, and available-for-sale investments was held
by our foreign subsidiaries.
During the first six months of 2002, cash of $12.6 million was provided
by operating activities compared with $13.3 million in the first six months of
2001. Decreases in accounts receivable and unbilled contract costs and fees
provided cash of $11.4 million and $0.7 million in 2002, respectively, primarily
at the Papermaking Equipment segment largely due to improved collection efforts.
In addition, a decrease in inventories provided cash of $2.7 million in 2002
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
$2.4 million in 2002 primarily at the Papermaking Equipment segment due to the
timing of payments. In addition, a use of cash of $4.9 million in 2002 resulted
from a decrease in other accrued liabilities, primarily accrued interest,
accrued warranty costs and, to a lesser extent, accrued income taxes.
Our investing activities, excluding available-for-sale investments and
advances to former affiliates, used $2.7 million of cash in the first six months
of 2002, compared with $1.1 million in the first six months of 2001. During the
first six months of 2002, we purchased property, plant, and equipment for $1.3
million, including $0.5 million at our composite building products business, the
effects of which were offset in part by our 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 2002 in
connection with the acquisition of the minority interest of our Thermo Fibergen
subsidiary.
Our financing activities used cash of $13.2 million in the first six
months of 2002, compared with $0.2 million in the first six months of 2001.
During the first six months of 2002, we used $29.3 million to fund repurchases
of our subordinated convertible debentures (Note 6), as well as $0.5 million to
fund the payment of long-term obligations. In addition, we paid $1.5 million in
connection with the acquisition of common stock of our Thermo Fibergen
subsidiary. These uses of cash were offset in part by $17.6 million of cash
provided from the June 2002 issuance of 1.3 million shares of our common stock
in a public offering (Note 8). 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.
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. As of June 29, 2002, we had $36.7
million remaining under these authorizations.
At June 29, 2002, we had $83.3 million of undistributed foreign earnings
that could be subject to tax if remitted to the U.S. If we repatriate
undistributed foreign earnings into the U.S., we do not expect that this will
have a material adverse effect on our current liquidity.
19
KADANT INC.
Liquidity and Capital Resources (continued)
Our net cash (calculated as cash, cash equivalents, and
available-for-sale investments less total short- and long-term debt) was $29.1
million at June 29, 2002, compared with net debt of $0.4 million at December 29,
2001.
During the remainder of 2002, we plan to make expenditures for property,
plant, and equipment of approximately $2.8 million, including $1.1 million at
our composite building products business. The composite expenditures largely
relate to refinements and improvements we are making to optimize the process and
expand capacity at our manufacturing facility. Our ability to use our cash and
to incur additional debt is limited by financial covenants in our distribution
agreement, as amended, with Thermo Electron. These financial covenants 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 June 29, 2002, we were in compliance with all the
financial covenants of the agreement, as amended. If we fail 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 any of 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 our 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.
Forward-Looking Statements
In connection with the "safe harbor" provisions of the Private Securities
Litigation Reform Act of 1995, we wish to caution readers that the following
important factors, among others, in some cases have affected, and in the future
could affect, our actual results and could cause our actual results in 2002 and
beyond to differ materially from those expressed in any forward-looking
statements made by us, or on our behalf.
Our business is dependent on the condition of the pulp and paper industry, which
is currently in a downcycle.
We sell products primarily to the pulp and paper industry. Generally, the
financial condition of the global pulp and paper industry corresponds to the
condition of the general economy, as well as to a number of other factors,
including pulp and paper production capacity relative to demand. The global pulp
and paper industry has been in a prolonged downcycle, with depressed pulp and
paper prices, decreased spending, mill closures, consolidations, and
bankruptcies. The North American pulp and paper industry has been particularly
adversely affected by higher energy prices, a strong U.S. dollar, and a slowing
domestic economy. This cyclical downturn has adversely affected our business.
Mill closures, consolidations, and bankruptcies of customers may cause our sales
to decline and, if we are unable to collect from our customers, may adversely
affect our profitability. The financial condition of the pulp and paper industry
may not improve in the near future, and the severity of the downturn could
expand to our European and Asian businesses.
20
KADANT INC.
Forward-Looking Statements (continued)
Our business is subject to economic, currency, political, and other risks
associated with international sales and operations.
During 2001, approximately 55% of our sales were to customers outside the
United States, principally in Europe. International revenues are subject to a
number of risks, including the following:
- agreements may be difficult to enforce and receivables difficult to
collect through a foreign country's legal system;
- foreign customers may have longer payment cycles;
- foreign countries may impose additional withholding taxes or
otherwise tax our foreign income, impose tariffs, or adopt other
restrictions on foreign trade; and
- the protection of intellectual property in foreign countries may be
more difficult to enforce.
Although we seek to charge our customers in the same currency in which
our operating costs are incurred, fluctuations in currency exchange rates may
affect product demand and adversely affect the profitability in U.S. dollars of
products we provide in foreign markets where payment for our products and
services is made in the local currency. Any of these factors could have a
material adverse impact on our business and results of operations.
An increasing portion of our international sales has and may in the
future come from China. An increase in revenues from China will expose us to
increased risk in the event of changes in the policies of the Chinese
government, political unrest or unstable economic conditions in China, or
developments in China or in U.S.-China relations that are adverse to trade,
including enactment of protectionist legislation or trade restrictions. In
addition, orders from customers in China, particularly for large systems that
have been tailored to a customer's specific requirements, involve increased risk
of cancellation prior to shipment due to payment terms that are applicable to
doing business in China.
We are subject to intense competition in all of our markets.
We encounter significant competition in each of our principal markets. We
believe that the principal competitive factors affecting the markets for our
products include quality, price, service, technical expertise, and product
innovation. Our competitors include a number of large multinational corporations
such as Voith Paper GmbH and Metso Corporation. Competition, especially in
China, could increase if new companies enter the market or if existing
competitors expand their product lines or intensify efforts within existing
product lines. Competitors' technologies may prove to be superior to ours. Many
of these competitors may have substantially greater financial, marketing, and
other resources than we do. As a result, they may be able to adapt more quickly
to new or emerging technologies and changes in customer requirements, or to
devote greater resources to the promotion and sale of their services and
products. Our current products, those under development, and our ability to
develop new technologies may not be sufficient to enable us to compete
effectively. In addition, our composite building products business is subject to
intense competition, particularly in the decking market, from traditional wood
products and other composite lumber manufacturers, many of whom have greater
financial, technical, and marketing resources than we do. As a result, we may be
unable to compete successfully in this market.
Our composite building products business is a new entrant into a new market. Our
success will depend on our ability to manufacture and commercialize our
composite building products.
In 2000, we began to develop, produce, market, and sell fiber-based
composite products primarily for the building industry. Development,
manufacturing, and commercialization of our composite building products will
require significant development and testing of the products, and our efforts may
not be successful. Further, our
21
KADANT INC.
Forward-Looking Statements (continued)
composite building products may not gain market acceptance. We may need to incur
significant branding and distribution expenses to successfully market and
distribute products. Our ability to market these products successfully will
depend on the willingness of consumers to purchase fiber-based composites in
lieu of wood-based building products. To penetrate the market and gain market
share, we will need to educate consumers, including wood suppliers, contractors,
and homebuilders, regarding the benefits of our fiber-based composite products
over products made of wood and other traditional materials. This strategy may
not be successful. We have no experience manufacturing these products at volume,
cost, and quality levels sufficient to satisfy expected demand, and we may
encounter difficulties in connection with any large-scale manufacturing or
commercialization of these new products. If we were to exit this business, we
would incur significant losses.
Our composite building products business may not be able to obtain effective
distribution of its products.
The composite building products business is subject to intense
competition, and we rely on distributors in the building products industry to
market, distribute, and sell our products. We may be unable to produce our
products in sufficient quantity to interest these distributors or to retain and
add new distributors. If we are unable to distribute our products effectively,
our revenues would decline and we would have to incur additional expenses to
market these products directly.
The failure of our composite building products to perform over long periods of
time could result in potential liabilities.
Our composite building products are fairly new, have not been on the
market for long periods of time, and may be used in applications for which we
may have no knowledge or limited experience. Because we have limited historical
experience, we may be unable to predict the potential liabilities related to
product warranty or product liability issues. If our products fail to perform
over their warranty periods, we may not have the ability to protect ourselves
adequately against this potential liability, which could reduce our operating
results as well our stock price.
We may not be able to obtain raw material for our composite building products
and fiber-based granules on commercially reasonable terms and are dependent on a
single mill for the raw material.
We are dependent on a single paper mill for the fiber used in the
manufacture of our composite building products and fiber-based granules. This
mill has the exclusive right to supply the papermaking byproducts used to
manufacture the granules used in our process. Although we believe our
relationship with the mill is good, the mill could decide not to renew its
contract with us in 2003, or may not renew on commercially reasonable terms, and
we would be forced to find an alternative supply for this raw material. We may
be unable to find an alternative supply on commercially reasonable terms or
could incur excessive transportation costs if an alternative supplier were
found, which would increase our manufacturing costs and may prevent our products
from being competitive.
Our inability to successfully identify and complete acquisitions or successfully
integrate any acquisitions could have a material adverse effect on our business.
Our strategy includes the acquisition of technologies and businesses that
complement or augment our existing products and services. Promising acquisitions
are difficult to identify and complete for a number of reasons, including
competition among prospective buyers and the need for regulatory, including
antitrust, approvals. Any acquisition we may complete may be made at a
substantial premium over the fair value of the net assets of the acquired
company. We may not be able to complete future acquisitions, integrate any
acquired businesses successfully into our existing businesses, make such
businesses profitable, or realize anticipated cost savings or synergies, if any,
from these acquisitions. The size and selection of suitable acquisition
candidates also may be limited due to the financial covenants we have with
Thermo Electron Corporation, our former parent company.
22
KADANT INC.
Forward-Looking Statements (continued)
Our inability to protect our intellectual property could have a material adverse
effect on our business. In addition, third parties may claim that we infringe
their intellectual property, and we could suffer significant litigation or
licensing expense as a result.
We place considerable emphasis on obtaining patent and trade secret
protection for significant new technologies, products, and processes because of
the length of time and expense associated with bringing new products through the
development process and into the marketplace. Our success depends in part on our
ability to develop patentable products and obtain and enforce patent protection
for our products both in the United States and in other countries. We own
numerous U.S. and foreign patents, and we intend to file additional
applications, as appropriate, for patents covering our products. We have filed
for a patent relating to our composite building products business. Patents may
not be issued for any pending or future patent applications owned by or licensed
to us, and the claims allowed under any issued patents may not be sufficiently
broad to protect our technology. Any issued patents owned by or licensed to us
may be challenged, invalidated, or circumvented, and the rights under these
patents may not provide us with competitive advantages. In addition, competitors
may design around our technology or develop competing technologies. Intellectual
property rights may also be unavailable or limited in some foreign countries,
which could make it easier for competitors to capture increased market position.
We could incur substantial costs to defend ourselves in suits brought against us
or in suits in which we may assert our patent rights against others. An
unfavorable outcome of any such litigation could materially adversely affect our
business and results of operations. In addition, as our patents expire, we rely
on trade secrets and proprietary know-how to protect our products. We cannot be
sure the steps we have taken or will take in the future will be adequate to
deter misappropriation of our proprietary information and intellectual property.
We also rely on trade secrets and proprietary know-how, which we seek to
protect, in part, by confidentiality agreements with our collaborators,
employees, and consultants. These agreements may be breached, we may not have
adequate remedies for any breach, and our trade secrets may otherwise become
known or be independently developed by our competitors.
Third parties may assert claims against us to the effect that we are
infringing on their intellectual property rights. We could incur substantial
costs and diversion of management resources in defending these claims, which
could have a material adverse effect on our business, financial condition, and
results of operations. In addition, parties making these claims could secure a
judgment awarding substantial damages, as well as injunctive or other equitable
relief, which could effectively block our ability to make, use, sell,
distribute, or market our products and services in the United States or abroad.
In the event that a claim relating to intellectual property is asserted against
us, or third parties not affiliated with us hold pending or issued patents that
relate to our products or technology, we may seek licenses to such intellectual
property or challenge those patents. However, we may be unable to obtain these
licenses on commercially reasonable terms, if at all, and our challenge may be
unsuccessful. Our failure to obtain the necessary licenses or other rights could
prevent the sale, manufacture, or distribution of our products and, therefore,
could have a material adverse effect on our business, financial condition, and
results of operations.
Fluctuations in our quarterly operating results may cause our stock price to
decline.
Given the nature of the markets in which we participate and the effect of
Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements"
(SAB 101), which became effective as of January 2000, we cannot reliably predict
future revenues and profitability, and unexpected changes may cause us to adjust
our operations. A significant proportion of our costs are fixed, due in part to
our significant sales, research and development, and manufacturing costs. Thus,
small declines in revenues could disproportionately affect our operating
results. Other factors that could affect our quarterly operating results
include:
- failure of our products to pass contractually agreed upon acceptance
tests, which would delay or prohibit recognition of revenues under
SAB 101;
- demand for and market acceptance of our products;
23
KADANT INC.
Forward-Looking Statements (continued)
- competitive pressures resulting in lower sales prices of our products;
- adverse changes in the pulp and paper industry;
- delays or problems in the introduction of new products by us;
- our competitors' announcements of new products, services, or
technological innovations;
- contractual liabilities incurred by us related to guarantees of our
equipment performance;
- increased costs of raw materials or supplies, including the cost of
energy; and
- changes in the timing of product orders.
Anti-takeover provisions in our charter documents and under Delaware law and the
potential tax effects of our spinoff from Thermo Electron could prevent or delay
transactions that our shareholders may favor.
Provisions of our charter and by-laws may discourage, delay, or prevent a
merger or acquisition that our shareholders may consider favorable, including
transactions in which shareholders might otherwise receive a premium for their
shares. For example, these provisions:
- authorize the issuance of "blank check" preferred stock without any
need for action by shareholders;
- provide for a classified board of directors with staggered three-year
terms;
- require supermajority shareholder voting to effect various amendments
to our charter and by-laws;
- eliminate the ability of our shareholders to call special meetings
of shareholders;
- prohibit shareholder action by written consent; and
- establish advance notice requirements for nominations for election to
our board of directors or for proposing matters that can be acted on
by shareholders at shareholder meetings.
In addition, our board of directors has adopted a shareholder rights plan
intended to protect shareholders in the event of an unfair or coercive offer to
acquire our company and to provide our board of directors with adequate time to
evaluate unsolicited offers. Preferred stock purchase rights have been
distributed to our common shareholders pursuant to the rights plan. This rights
plan may have anti-takeover effects. The rights plan will cause substantial
dilution to a person or group that attempts to acquire us on terms that our
board of directors does not believe are in our best interests and those of our
shareholders and may discourage, delay, or prevent a merger or acquisition that
shareholders may consider favorable, including transactions in which
shareholders might otherwise receive a premium for their shares.
The tax treatment of the distribution of our common stock by Thermo
Electron under the Internal Revenue Code and regulations thereunder could also
serve to discourage an acquisition of our company. An acquisition of our company
within two years following the distribution, which took place in August 2001,
could result in federal tax liability being imposed on Thermo Electron and, in
more limited circumstances, on shareholders of Thermo Electron who received
shares of our common stock in the distribution. In addition, even acquisitions
occurring more than two years after the distribution could cause the
distribution to be taxable to Thermo Electron if the acquisitions were
determined to be pursuant to an overall plan that existed at the time of the
distribution. As part of the distribution, we have indemnified Thermo Electron,
but not the shareholders of Thermo Electron, for any resulting tax liability if
the tax liability is attributable to certain acts by us, including an
acquisition of our company. The prospect of that tax liability and our
indemnification obligation may have anti-takeover effects.
A number of actions following the spinoff from Thermo Electron could cause the
distribution to be fully taxable to shareholders of Thermo Electron who received
shares of our common stock in the distribution and/or to Thermo Electron, and to
us.
The IRS has issued a ruling that no gain or loss will be recognized by
us, Thermo Electron, or its shareholders upon the distribution of our common
stock as of the date of the distribution, except with respect to cash received
in lieu of fractional shares of our common stock and distributions of our common
stock acquired by Thermo Electron within
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KADANT INC.
Forward-Looking Statements (continued)
the past five years in taxable transactions. However, the distribution could
become fully taxable if we, Thermo Electron, or the shareholders of Thermo
Electron who received shares of our common stock in the distribution, take any
of a number of actions following the distribution. We have entered into a tax
matters agreement with Thermo Electron that restricts our ability to engage in
these types of actions. If any conditions of the IRS ruling are not satisfied,
the distribution could become taxable to the shareholders of Thermo Electron who
received shares of our common stock in the distribution and/or Thermo Electron.
As part of the distribution, we have indemnified Thermo Electron, but not the
shareholders of Thermo Electron, for any resulting tax liability if the tax
liability is attributable to certain acts by us.
Sales of substantial amounts of our common stock may occur from time to time,
which could cause our stock price to decline.
Our shares were distributed pro rata to the shareholders of Thermo
Electron, and from time to time, these shareholders have sold and may in the
future sell substantial amounts of our common stock in the public market if our
shares no longer meet their investment criteria or other objectives. Any sales
of substantial amounts of our common stock in the public market, or the
perception that such sales might occur, whether as a result of the distribution
or otherwise, could cause the market price of our common stock to decline.
If we are unable to comply with the financial covenants contained in our
distribution agreement with Thermo Electron, we may be required to take certain
actions that could compromise our ability to execute our business plan.
We have agreed to certain financial covenants contained in our
distribution agreement with Thermo Electron that restrict our use of cash and
our ability to incur additional debt as part of Thermo Electron's continued
guarantee of our subordinated convertible debentures. If we fail to comply with
these financial covenants, Thermo Electron could, among other things, 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 any of
these actions, we might not have sufficient cash or credit capacity to engage in
transactions, such as significant acquisitions, that might otherwise benefit our
business.
Continuing low interest rates, coupled with declines in operating income, could
cause us to no longer be in compliance with the financial covenants contained in
our distribution agreement with Thermo Electron, and we may be unable to
renegotiate the covenants or obtain a waiver from Thermo Electron.
The unexpected decline in interest rates in the fall of 2001, coupled
with lower invested cash balances and lower operating income, resulted in our
non-compliance with one of the financial covenants originally negotiated in our
distribution agreement with Thermo Electron. We were able to negotiate an
amendment to the agreement that resulted in our compliance with the financial
covenants, as amended. If we should again fail to comply with the financial
covenants, there is no assurance that Thermo Electron would either renegotiate
the covenants on terms satisfactory to us or grant a waiver.
We may have potential business conflicts of interest with Thermo Electron with
respect to our past and ongoing relationships that could harm our business
operations.
Conflicts of interest may arise between Thermo Electron and us in a
number of areas relating to our past and ongoing relationships, including:
labor, tax, employee benefit, indemnification, and other matters arising from
our separation from Thermo Electron; and restrictions related to our use of cash
and our ability to incur indebtedness in connection with Thermo Electron's
continuing obligations under its guarantees of our subordinated convertible
debentures. We may not be able to resolve any potential conflicts.
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KADANT INC.
PART II - OTHER INFORMATION
Item 2 - Changes in Securities and Use of Proceeds
- --------------------------------------------------
In April 2002, we issued an aggregate of 7,500 shares of our common
stock, $0.01 par value per share, to our outside directors pursuant to our
directors restricted stock plan. Under this plan, each director may elect to
receive 2,500 shares of restricted stock in lieu of cash fees for their service
as a director. The shares issued to directors are restricted from resale for
five years, with certain exceptions. The shares were issued in reliance on the
exemption from registration contained in Section 4(2) of the Securities Act of
1933.
For a description of restrictions on our working capital that may be
imposed due to the financial covenants contained in our distribution agreement
with Thermo Electron, refer to the section captioned "Liquidity and Capital
Resources" in Item 2 of Part I in this report on Form 10-Q.
Item 4 - Submission of Matters to a Vote of Security Holders
- ------------------------------------------------------------
On May 16, 2002, at the Annual Meeting of Shareholders, the shareholders
elected one incumbent director, Dr. John M. Albertine, to a three-year term
expiring in 2005. Dr. Albertine received 10,662,279 shares cast in favor of his
election and 103,687 shares cast against his election.
The shareholders also approved a second proposal at the annual meeting,
recommended by our board of directors, to amend our equity incentive plan to
increase the annual limit on the potential size of individual awards to 500,000
shares. The proposal received 8,420,969 shares cast in favor, 2,301,318 shares
cast against, and 43,679 shares abstained. No broker non-votes were recorded on
the proposal.
Item 6 - Exhibits and Reports on Form 8-K
- -----------------------------------------
(a) Exhibits
See Exhibit Index on the page immediately preceding exhibits.
(b) Reports on Form 8-K
On June 14, 2002, we filed a Current Report on Form 8-K, dated June 14,
2002, to report under Item 5 (Other Events) the sale of 1.3 million shares of
our common stock.
On June 20, 2002, the Company filed a Current Report on Form 8-K, dated
June 19, 2002, to report under Item 4 (Changes in Registrant's Certifying
Accountant) a change in our independent auditor.
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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 August 2002.
KADANT INC.
/s/ Thomas M. O'Brien
-----------------------------
Thomas M. O'Brien
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer)
27
KADANT INC.
EXHIBIT INDEX
Exhibit
Number Description of Exhibit
- --------------------------------------------------------------------------------
10 Amended and Restated Equity Incentive Plan
99 Certification Pursuant to Section 906 of Sarbanes-Oxley Act of 2002
28