UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
-------------------------------------------------
FORM 10-Q
(mark one)
[ X ] Quarterly Report Under Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the Quarterly Period Ended March 29, 2003
or
[ ] 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
Incorporation or Organization) Identification No.)
One Acton Place, Suite 202
Acton, Massachusetts 01720
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code: (978) 776-2000
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months and (2) has been subject to such filing
requirements for the past 90 days. Yes [ X ] No [ ]
Indicate by check mark whether or not the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Exchange Act). Yes [ X ] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at April 25, 2003
---------------------------- -----------------------------
Common Stock, $.01 par value 13,584,445
PART I - Financial Information
Item 1 - Financial Statements
- -----------------------------
KADANT INC.
Condensed Consolidated Balance Sheet
(Unaudited)
Assets
March 29, December 28,
(In thousands) 2003 2002
- --------------------------------------------------------------------------------------------------------------------------------
Current Assets:
Cash and cash equivalents $ 44,977 $ 44,429
Accounts receivable, less allowances of $2,822 and $2,634 31,278 30,818
Unbilled contract costs and fees 12,252 6,002
Inventories (Note 5) 31,891 29,486
Deferred tax asset 6,620 6,668
Other current assets 3,155 2,974
-------- --------
130,173 120,377
-------- --------
Property, Plant, and Equipment, at Cost 72,614 70,220
Less: Accumulated depreciation and amortization 47,118 44,759
-------- --------
25,496 25,461
-------- --------
Other Assets 13,998 13,458
-------- --------
Goodwill 72,014 72,221
-------- --------
$241,681 $231,517
======== ========
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KADANT INC.
Condensed Consolidated Balance Sheet (continued)
(Unaudited)
Liabilities and Shareholders' Investment
March 29, December 28,
(In thousands except share amounts) 2003 2002
- --------------------------------------------------------------------------------------------------------------------------------
Current Liabilities:
Current maturities of long-term notes payable $ 598 $ 585
Accounts payable 22,452 18,093
Accrued payroll and employee benefits 7,190 9,445
Accrued warranty costs 4,564 4,310
Customer deposits 2,310 2,301
Other current liabilities 11,699 10,942
-------- --------
48,813 45,676
-------- --------
Deferred Income Taxes 983 940
-------- --------
Other Long-term Liabilities 2,884 2,763
-------- --------
Long-term Notes Payable 363 580
-------- --------
Minority Interest 302 301
-------- --------
Shareholders' Investment (Note 7):
Preferred stock, $.01 par value, 5,000,000 shares authorized;
none issued - -
Common stock, $.01 par value, 150,000,000 shares authorized;
14,049,539 and 14,045,550 shares issued 140 140
Capital in excess of par value 98,029 98,567
Retained earnings 119,697 116,702
Treasury stock at cost, 475,259 and 495,265 shares (20,057) (20,901)
Deferred compensation - (27)
Accumulated other comprehensive items (Note 2) (9,473) (13,224)
-------- --------
188,336 181,257
-------- --------
$241,681 $231,517
======== ========
The accompanying notes are an integral part of these condensed consolidated financial statements.
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KADANT INC.
Condensed Consolidated Statement of Operations
(Unaudited)
Three Months Ended
------------------------------
March 29, March 30,
(In thousands except per share amounts) 2003 2002
- -------------------------------------------------------------------------------------------------------------------------------
Revenues $ 51,375 $ 43,340
-------- --------
Costs and Operating Expenses:
Cost of revenues 32,208 27,187
Selling, general, and administrative expenses 13,512 12,691
Research and development expenses 1,043 1,288
Restructuring and unusual costs - 3,637
-------- --------
46,763 44,803
-------- --------
Operating Income (Loss) 4,612 (1,463)
Interest Income 236 655
Interest Expense (17) (1,429)
Other Income (Note 8) - 47
-------- --------
Income (Loss) Before Income Taxes and Cumulative Effect of Change in
Accounting Principle 4,831 (2,190)
Income Tax (Provision) Benefit (1,836) 831
-------- --------
Income (Loss) Before Cumulative Effect of Change in Accounting Principle 2,995 (1,359)
Cumulative Effect of Change in Accounting Principle (net of income tax
benefit of $12,420) - (32,756)
-------- --------
Net Income (Loss) $ 2,995 $(34,115)
======== ========
Basic and Diluted Earnings (Loss) per Share Before Cumulative Effect of
Change in Accounting Principle $ .22 $ (.11)
======== ========
Basic and Diluted Earnings (Loss) per Share (Note 3) $ .22 $ (2.79)
======== ========
Weighted Average Shares (Note 3):
Basic 13,574 12,239
======== ========
Diluted 13,767 12,239
======== =========
The accompanying notes are an integral part of these condensed consolidated financial statements.
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Condensed Consolidated Statement of Cash Flows
(Unaudited)
Three Months Ended
------------------------------
March 29, March 30,
(In thousands) 2003 2002
- ----------------------------------------------------------------------------------------------------------------------------------
Operating Activities:
Net income (loss) $ 2,995 $(34,115)
Adjustments to reconcile net income (loss) to net cash provided by (used
in) operating activities:
Noncash restructuring and unusual costs - 2,441
Cumulative effect of change in accounting principle, net of tax benefit - 32,756
Depreciation and amortization 1,285 1,342
Provision for losses on accounts receivable 175 -
Other noncash items 116 142
Changes in current accounts:
Accounts receivable (265) 3,315
Unbilled contract costs and fees (6,204) 3,918
Inventories (2,080) 3,116
Other current assets (282) (1,849)
Accounts payable 4,184 (3,073)
Other current liabilities (964) (4,747)
------- --------
Net cash provided by (used in) operating activities (1,040) 3,246
------- --------
Investing Activities:
Purchases of property, plant, and equipment (853) (595)
Acquisition of minority interest in subsidiary - (1,364)
Purchases of available-for-sale investments - (1,615)
Proceeds from repayments of note receivable - 200
Other, net (52) (161)
------- --------
Net cash used in investing activities (905) (3,535)
------- --------
Financing Activities:
Repurchases of Company subordinated convertible debentures - (2,806)
Net proceeds from issuance of Company and subsidiary common stock 306 469
Acquisition of subsidiary common stock - (1,461)
Repayments of long-term obligations (204) (192)
------- --------
Net cash provided by (used in) financing activities 102 (3,990)
------- --------
Exchange Rate Effect on Cash 2,391 (243)
------- --------
Increase (Decrease) in Cash and Cash Equivalents 548 (4,522)
Cash and Cash Equivalents at Beginning of Period 44,429 102,807
------- --------
Cash and Cash Equivalents at End of Period $44,977 $ 98,285
======= ========
The accompanying notes are an integral part of these condensed consolidated financial statements.
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Notes to Condensed Consolidated Financial Statements
(Unaudited)
1. General
The interim condensed consolidated financial statements and related notes
presented have been prepared by Kadant Inc. (also referred to in this document
as "we," "Kadant," "the Company," or "the Registrant") without audit and, in the
opinion of management, reflect all adjustments of a normal recurring nature
necessary for a fair statement of the Company's financial position at March 29,
2003, and its results of operations and cash flows for the three-month periods
ended March 29, 2003, and March 30, 2002. Interim results are not necessarily
indicative of results for a full year.
Historical financial results have been restated to reflect the adoption
of the Financial Accounting Standards Board's (FASB) Statement of Financial
Accounting Standards (SFAS) No. 142, "Goodwill and Other Intangible Assets" and
SFAS No. 145, "Rescission of FASB Statement No. 4, 44, and 64, Amendment of FASB
Statement No. 13, and Technical Corrections" (Note 8). The condensed
consolidated balance sheet presented as of December 28, 2002, has been derived
from the consolidated financial statements that have been audited by the
Company's independent auditors. The condensed consolidated financial statements
and related notes are presented as permitted by Form 10-Q and do not contain
certain information included in the annual financial statements and related
notes of the Company. The condensed consolidated financial statements and notes
included herein should be read in conjunction with the financial statements and
related notes included in the Company's Annual Report on Form 10-K for the
fiscal year ended December 28, 2002, filed with the Securities and Exchange
Commission.
2. Comprehensive Income (Loss)
Comprehensive income (loss) combines net income (loss) and "other
comprehensive items," which represents certain amounts that are reported as
components of shareholders' investment in the accompanying balance sheet,
including foreign currency translation adjustments and deferred gains and losses
on foreign currency contracts. During the first quarters of 2003 and 2002, the
Company had comprehensive income of $6,746,000 and a comprehensive loss of
$34,778,000, respectively.
3. Earnings (Loss) per Share
Basic and diluted earnings (loss) per share were calculated as follows:
Three Months Ended
--------------------------
March 29, March 30,
(In thousands except per share amounts) 2003 2002
- --------------------------------------------------------------------------------------------------------------------------------
Basic
Income (Loss) Before Cumulative Effect of Change in Accounting Principle $ 2,995 $ (1,359)
Cumulative Effect of Change in Accounting Principle (net of income tax
benefit of $12,420) - (32,756)
------- --------
Net Income (Loss) $ 2,995 $(34,115)
------- --------
Weighted Average Shares 13,574 12,239
------- --------
Basic Earnings (Loss) per Share:
Income (Loss) Before Cumulative Effect of Change in Accounting Principle $ .22 $ (.11)
Cumulative Effect of Change in Accounting Principle - (2.68)
------- --------
$ .22 $ (2.79)
======= ========
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Notes to Condensed Consolidated Financial Statements
(Unaudited)
3. Earnings (Loss) per Share (continued)
Three Months Ended
--------------------------
March 29, March 30,
(In thousands except per share amounts) 2003 2002
- --------------------------------------------------------------------------------------------------------------------------------
Diluted
Income (Loss) Before Cumulative Effect of Change in Accounting Principle $ 2,995 $ (1,359)
Cumulative Effect of Change in Accounting Principle (net of income tax
benefit of $12,420) - (32,756)
------- --------
Net Income (Loss) $ 2,995 $(34,115)
------- --------
Weighted Average Shares 13,574 12,239
Effect of Stock Options 193 -
------- --------
Weighted Average Shares, as Adjusted 13,767 12,239
------- --------
Diluted Earnings (Loss) per Share:
Income (Loss) Before Cumulative Effect of Change in Accounting Principle $ .22 $ (.11)
Cumulative Effect of Change in Accounting Principle - (2.68)
------- --------
$ .22 $ (2.79)
======= ========
Options to purchase approximately 393,400 and 2,473,600 shares of common
stock for the first quarters of 2003 and 2002, respectively, were not included
in the computation of diluted earnings per share because the options' exercise
prices were greater than the average market price for the common stock and/or
their effect would have been antidilutive.
In addition, the computation of diluted earnings per share in 2002
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 have been antidilutive. The debentures were no longer
outstanding as of December 28, 2002.
4. Warranty Obligations
The Company provides for the estimated cost of product warranties,
primarily using historical information and estimated repair costs, at the time
product revenue is recognized. In the Pulp and Papermaking Equipment and Systems
segment, the Company typically negotiates the terms regarding warranty coverage
and length of warranty depending on the products and applications. In the
Composite and Fiber-based Products segment, the Company offers a standard
limited warranty on our decking and roofing products restricted to repair or
replacement of the defective product or refund of the original purchase price.
While the Company engages in extensive product quality programs and processes,
the Company's warranty obligation is affected by product failure rates, repair
costs, service delivery costs incurred in correcting a product failure, and
supplier warranties on parts delivered to the Company. Should actual product
failure rates, repair costs, service delivery costs, or supplier warranties on
parts differ from the Company's
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Notes to Condensed Consolidated Financial Statements
(Unaudited)
4. Warranty Obligations (continued)
estimates, revisions to the estimated warranty liability would be required. The
changes in the carrying amount of product warranties for the three months ended
March 29, 2003, are as follows:
(In thousands) March 29, 2003
- -------------------------------------------------------------------------------------------------------------
Balance at December 28, 2002 $ 4,310
Provision charged to income 603
Usage (470)
Other, net (a) 121
-------
Balance at March 29, 2003 $ 4,564
========
(a) Primarily represents the effects of currency translation.
5. Inventories
The components of inventories are as follows:
March 29, Dec. 28,
(In thousands) 2003 2002
- ---------------------------------------------------------------------------------------------------------------------------------
Raw Materials and Supplies $ 13,886 $ 12,937
Work in Process 5,779 6,126
Finished Goods (includes $931 and $954 at customer locations) 12,226 10,423
-------- --------
$ 31,891 $ 29,486
======== ========
6. Business Segment Information
Three Months Ended
-----------------------------
March 29, March 30,
(In thousands) 2003 2002
- ---------------------------------------------------------------------------------------------------------------------------------
Revenues:
Pulp and Papermaking Equipment and Systems $ 45,557 $ 40,577
Composite and Fiber-based Products 5,818 2,763
-------- --------
$ 51,375 $ 43,340
======== ========
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Notes to Condensed Consolidated Financial Statements
(Unaudited)
6. Business Segment Information (continued)
Three Months Ended
----------------------------
March 29, March 30,
(In thousands) 2003 2002
- ---------------------------------------------------------------------------------------------------------------------------------
Income (Loss) Before Income Taxes and Cumulative Effect of
Change in Accounting Principle (a):
Pulp and Papermaking Equipment and Systems (b) $ 5,240 $ 1,883
Composite and Fiber-based Products (c) (d) 412 (2,473)
Corporate (e) (1,040) (873)
------- -------
Total Operating Income (Loss) 4,612 (1,463)
Interest and Other Income (Expense), Net 219 (727)
------- -------
$ 4,831 $(2,190)
======= =======
Capital Expenditures:
Pulp and Papermaking Equipment and Systems $ 202 $ 332
Composite and Fiber-based Products 648 263
Corporate 3 -
------- -------
$ 853 $ 595
======= =======
(a) Restated in the 2002 period to reflect the reclassification to "other income" of an extraordinary item resulting from
repurchases of our subordinated convertible debentures in accordance with the adoption of SFAS No. 145 (Note 8).
(b) Includes restructuring and unusual costs of $1,998 in the 2002 period.
(c) Includes restructuring and unusual costs of $1,639 in the 2002 period.
(d) Includes operating income from the composite building products business of $84 in the 2003 period and an operating
loss of $2,170, including restructuring and unusual costs of $1,116, in the 2002 period.
(e) Primarily general and administrative expenses.
7. Stock-Based Compensation
During 2002, the FASB issued SFAS No. 148, "Accounting for Stock-based
Compensation - Transition and Disclosure," which provides alternative methods of
accounting for stock-based compensation and amends SFAS No. 123, "Accounting for
Stock-based Compensation," which provides a fair-value method of recognizing
stock-based compensation expense. As permitted by SFAS No. 148 and SFAS No. 123,
the Company has elected to continue to apply APB No. 25 to account for its
stock-based compensation plans. No stock-based employee compensation cost
related to stock option awards is reflected in net income as all options granted
under the plans had an exercise price equal to the market value of the
underlying common stock on the date of grant. Had compensation cost for awards
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Notes to Condensed Consolidated Financial Statements
(Unaudited)
7. Stock-Based Compensation (continued)
granted after 1994 under the Company's stock-based compensation plans been
determined based on the fair value at the grant dates consistent with the method
set forth under SFAS No. 123, the effect on certain of the Company's financial
results would have been as follows:
Three Months Ended
------------------------
March 29, March 30,
(In thousands except per share amounts) 2003 2002
- ---------------------------------------------------------------------------------------------------------------------------
Net Income (Loss):
As reported $ 2,995 $(34,115)
Deduct: Total stock-based employee compensation expense determined under the
fair-value-based method for all awards, net of tax (407) (240)
-------- --------
Pro forma $ 2,588 $(34,355)
======= ========
Basic and Diluted Earnings (Loss) per Share:
As reported .22 (2.79)
Pro forma .19 (2.81)
8. Recent Accounting Pronouncements
Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement
- ----------------------------------------------------------------------------
No. 13, and Technical Corrections
- ---------------------------------
In May 2002, the FASB issued SFAS No. 145, "Rescission of FASB
Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections." Adoption of the standard is generally required in 2003. Under the
standard, transactions initially classified by the Company as extraordinary
items, such as gains and losses from the Company's early extinguishment of its
convertible debentures, will no longer be treated as such, but instead will be
reported as other nonoperating income or expense. The Company reclassified the
gain from repurchases of its debentures in the first quarter of 2002 to "other
income" in the accompanying statement of operations to conform to this standard.
Accounting for Revenue Arrangements with Multiple Deliverables
- --------------------------------------------------------------
In November 2002, the Emerging Issues Task Force (EITF) reached a final
consensus on EITF No. 00-21, "Accounting for Revenue Arrangements with Multiple
Deliverables." The provisions of EITF No. 00-21 are required to be adopted for
revenue arrangements entered into by the Company in fiscal periods beginning
after June 15, 2003, although early adoption is permitted. EITF No. 00-21
addresses arrangements with customers that have multiple deliverables, such as
equipment and installation, and provides guidance as to when recognition of
revenue for each deliverable is appropriate. The Company is currently evaluating
the impact of the adoption of EITF No. 00-21 on its consolidated financial
statements.
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Notes to Condensed Consolidated Financial Statements
(Unaudited)
8. Recent Accounting Pronouncements (continued)
Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
- ----------------------------------------------------------------------------
Indirect Guarantees of Indebtedness of Others
- ---------------------------------------------
In November 2002, the FASB issued FASB Interpretation (FIN) No. 45,
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others." FIN No. 45 clarifies that a
guarantor is required to recognize, at the inception of a guarantee, a liability
for the fair value of the obligation undertaken in issuing the guarantee. The
initial recognition and initial measurement provisions of FIN No. 45 are
applicable on a prospective basis to guarantees issued or modified after
December 31, 2002. Adoption of this standard did not have an effect on the
Company's financial statements. See Note 4 for the Company's related disclosure
requirement under this standard.
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 "Risk Factors" in this report on Form 10-Q. We assume no
obligation to update any such forward-looking statements.
Overview
Company Background
We operate in two segments: the Pulp and Papermaking Equipment and
Systems (Papermaking Equipment) segment and the Composite and Fiber-based
Products segment. Through our Papermaking Equipment segment, we develop,
manufacture, and market a range of equipment and products for the domestic and
international papermaking and paper recycling industries. We have a large,
stable customer base that includes most of the world's major paper
manufacturers. As a result, we have one of the largest installed bases of
equipment in the pulp and paper industry, which provides us with a high-margin
spare parts and consumables business that we believe is less susceptible to the
cyclical trends in the paper industry.
Through our Composite and Fiber-based Products segment, we develop,
manufacture, and market composite products made from recycled fiber and plastic,
primarily for the building industry, and manufacture and sell granules derived
from pulp fiber for use as agricultural carriers and for home lawn and garden
applications.
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, and as the successor-in-interest to several of
its subsidiaries. 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 to Kadant Inc. from Thermo
Fibertek Inc., and on August 8, 2001, we were spun off from Thermo Electron and
became a fully independent public company.
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Overview (continued)
Pulp and Papermaking Equipment and Systems Segment
Our Papermaking Equipment segment designs and manufactures
stock-preparation systems and equipment, papermaking machine accessories, and
water-management systems for the paper and paper recycling industries. Principal
products include:
- Stock-preparation systems and equipment: custom-engineered systems
and equipment for pulping, de-inking, screening, cleaning, and
refining waste fiber to prepare it for entry into the paper machine
during production of recycled paper;
- Papermaking machine accessory equipment: doctoring systems and
related consumables that clean papermaking rolls to keep paper
machines running efficiently, and profiling systems that control
moisture, web curl, and gloss during paper production; and
- Water-management systems: equipment that is essential for the
continuous cleaning of paper machine fabrics and the draining,
purifying, and recycling of process water for paper sheet formation.
Composite and Fiber-Based Products Segment
Our Composite and Fiber-based Products segment consists of two product
lines: composite building products and fiber-based granular products. Our
principal products include:
- Composite building products: decking and railing systems and roof
tiles that we develop and produce from a combination of recycled
fiber, plastic, and other materials, and market primarily to the
building industry; and
- Fiber-based granular products: biodegradable, absorbing granules that
we produce from papermaking byproducts for use as agricultural
carriers and for home lawn and garden applications.
International Sales
During 2002, approximately 50% 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.
Application of Critical Accounting Policies and Estimates
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
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Overview (continued)
subjective decisions or assessments, are those described in "Management's
Discussion and Analysis of Financial Condition and Results of Operations" under
the section captioned "Application of Critical Accounting Policies and
Estimates" in Exhibit 13 to our Annual Report on Form 10-K for the fiscal year
ended December 28, 2002, filed with the Securities and Exchange Commission.
There have been no material changes since year-end 2002 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 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 their
suppliers, such as Kadant.
There has been a significant amount of papermaking downtime in the pulp
and paper industry in the last few years. This, coupled with weakened conditions
in the world economy, has produced a difficult market environment resulting in
deferrals of capital projects by paper companies and pricing pressure in some of
our product lines. To mitigate the effects of these difficult market conditions,
we are concentrating our efforts on several initiatives to improve our operating
results, including focusing on higher-margin parts and consumables businesses
across all our product lines, sourcing the manufacture of non-proprietary
components from third-party suppliers, shifting more production to our
lower-cost manufacturing facilities, and lowering our manufacturing overhead
costs throughout the business. In addition, we continue to focus our efforts on
managing our operating costs, capital expenditures, and working capital.
Despite the challenging industry environment, we are pursuing several
market opportunities. In the last several years, China has become a significant
market for our products. Revenues from China primarily arise from large capital
orders, the timing of which is often difficult to predict. To capitalize on this
growing market, we are in the process of establishing an assembly facility in
China for our stock-preparation equipment and related aftermarket products.
Orders from China of nearly $16 million for stock-preparation equipment largely
contributed to the 31% increase (25% excluding currency exchange effects) in
total Company bookings, to $61.1 million in the first quarter of 2003, which was
our best bookings quarter in three years, compared with $46.7 million in the
first quarter of 2002. The bookings growth came entirely from our Papermaking
Equipment segment due to the orders from China, and a combined 14% increase in
orders in the accessories and water-management product lines.
We have also continued to invest in our composite building products
business, which, we believe, provides us with an internal growth opportunity. 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 chromated copper arsenate
(CCA), a potentially harmful preservative. We are continuing our national
marketing program for our composite building products and are expanding our
distribution network, with numerous distribution centers carrying our products
throughout the U.S. We have recently added distributors in Northern California,
Louisiana, and eastern Pennsylvania. Record orders in the fourth quarter of
2002, coupled with an unusually long winter, which delayed the start of the
building season, have resulted in reduced first quarter bookings. In addition,
the price of plastic used in our composite products has dramatically increased
in recent months. Plastic is our largest cost in the manufacture of our
composite products and this increase will have a significant impact on our
profitability in the composites building products business for the remainder of
2003. These factors considered, we are lowering our guidance for the composite
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KADANT INC.
Overview (continued)
building products business in 2003. We had projected operating income of $1.0 to
$1.5 million for the year, on revenues of $14 to $16 million. We now expect
operating income of $300,000 to $600,000, on revenues of $13 to $15 million for
the year.
Because of the strong bookings mentioned above in the Papermaking
Equipment segment, which has more than offset lower-than-expected bookings
levels in the composite building products business, we are raising our
earlier earnings per share and revenue guidance of $.80 to $.90 and $185 to $195
million, respectively. We now expect to earn, on a consolidated GAAP (generally
accepted accounting principles) basis, from $.24 to $.26 per diluted share, on
revenues of $53 to $55 million in the second quarter of 2003. For the full year,
we are raising our guidance slightly to account for what we believe will be a
strong first half, but are factoring in the continued uncertainty in the
worldwide economy and in the industry - the net effect being lower sequential
earnings in the third quarter of 2003 and higher sequential results in the
fourth quarter of 2003. We now expect to earn from $.84 to $.92 per diluted
share for 2003, on revenues of $190 to $200 million.
Results of Operations
First Quarter 2003 Compared With First Quarter 2002
- ---------------------------------------------------
Revenues
Revenues increased to $51.4 million in the first quarter of 2003 from
$43.3 million in the first quarter of 2002, an increase of $8.1 million, or 19%.
Revenues in 2003 include the favorable effect of currency translation of $2.1
million due to a weaker U.S. dollar relative to most of the functional
currencies in countries in which we operate.
Pulp and Papermaking Equipment and Systems Segment. Revenues at the
Papermaking Equipment segment increased to $45.6 million in the first quarter of
2003 compared with $40.6 million in the first quarter of 2002, an increase of
$5.0 million, or 12%. Revenues in 2003 include the favorable effect of currency
translation described above, all of which occurred in this segment. Revenues
from the Papermaking Equipment segment's stock-preparation equipment product
line increased by $5.9 million, or 32%, in 2003 primarily as a result of an
increase in export sales to China, offset in part by a decrease in sales in
North America due to continued market weakness. Revenues from the segment's
water-management and accessories product lines decreased in 2003 by $0.6
million, or 8%, and $0.3 million, or 2%, 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. Revenues at the Composite
and Fiber-based Products segment increased to $5.8 million in the first quarter
of 2003 from $2.8 million in 2002, as a result of an increase of $3.4 million in
sales of our composite building products due to higher demand resulting from our
winter-buy discount program, increased marketing efforts, and expansion of our
distribution channels. This increase was slightly offset by a decrease in
revenues from our fiber-based granular products of $0.3 million in the first
quarter of 2003 compared with the first quarter of 2002.
Gross Profit Margin
Gross profit margin remained constant at 37% in the first quarters of
2003 and 2002. The gross profit margin at the Papermaking Equipment segment
decreased slightly to 38% in 2003 from 39% in 2002 primarily due to an overall
change in product mix to a higher percentage of lower-margin capital equipment
revenues, offset in part by an increase in parts and consumables gross profit
margins. The gross profit margin at the Composite and Fiber-based Products
segment increased to 32% in the first quarter of 2003 from 16% in the first
quarter of 2002 due to a change to positive gross profit margins in 2003 from
our composite building products resulting primarily from increased revenues. In
addition, gross profit margins from our fiber-based granular products increased
due to a favorable change in product
<
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> KADANT INC.
First Quarter 2003 Compared With First Quarter 2002 (continued)
- ---------------------------------------------------
mix. The price of plastic used in the production of our composite products has
increased dramatically in the last several months. We do not expect plastic
prices to remain at these elevated levels throughout 2003, but if this were to
occur, the gross profit margins at this segment would be adversely affected from
the levels expected.
Operating Expenses
Selling, general, and administrative expenses as a percentage of
revenues were 26% in the first quarter of 2003 compared with 29% in the first
quarter of 2002 due to the increase in revenues. Selling, general, and
administrative expenses increased to $13.5 million in 2003 from $12.7 million in
2002 primarily due to the effects of foreign currency translation at the
Papermaking Equipment segment.
Research and development expenses as a percentage of revenues were 2% in
the first quarter of 2003 compared with 3% in the first quarter of 2002
primarily due to the increase in revenues. Research and development expenses
decreased to $1.0 million in 2003 compared with $1.3 million in 2002, primarily
at the Papermaking Equipment segment due to restructuring efforts taken in 2002
and the closure of a redundant laboratory in the second quarter of 2002.
Restructuring and Unusual Costs
During the first quarter of 2002, we 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 Pronouncement No. 94-3,
related to severance costs for 62 employees across all functions primarily at
the Papermaking Equipment segment, all of whom were 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 for our
products. 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. We estimated annual savings of approximately $4.5
million ($1.7 million in cost of revenues; $2.3 million in selling, general, and
administrative expenses; and $0.5 million in research and development expenses)
from these actions beginning in the second quarter of 2002.
Interest Income and Expense
Interest income decreased to $0.2 million in the first quarter of 2003
from $0.7 million in the first quarter of 2002 primarily due to lower average
invested balances. The decrease in average invested balances primarily relates
to the repurchase and redemption of our subordinated convertible debentures in
2002, offset in part by proceeds received from our June 2002 public stock
offering.
Interest expense decreased to $17,000 in the first quarter of 2003 from
$1.4 million in the first quarter of 2002 as a result of the redemption and
repurchases of our subordinated convertible debentures in 2002. We expect
interest expense will be significantly lower throughout 2003 compared with 2002
due to the redemption of the debentures.
Income Taxes
Our effective tax rate was 38% in the first quarters of 2003 and 2002.
The effective tax rates exceeded the statutory federal income tax rate primarily
due to the impact of state income taxes and nondeductible expenses.
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> KADANT INC.
First Quarter 2003 Compared With First Quarter 2002 (continued)
- ---------------------------------------------------
Cumulative Effect of Change in Accounting Principle
In accordance with the requirements of SFAS No. 142, "Goodwill and Other
Intangible Assets," which we adopted as of December 30, 2001, we recorded a
transitional goodwill impairment charge in our restated results in the first
quarter of 2002, representing the cumulative effect of a change in accounting
principle of $32.8 million (consisting of $29.9 million at the Papermaking
Equipment segment and $2.9 million at the Composite and Fiber-based Products
segment), net of income tax benefit of $12.4 million.
Liquidity and Capital Resources
Consolidated working capital was $81.4 million at March 29, 2003,
compared with $74.7 million at December 28, 2002. Included in working capital
are cash and cash equivalents of $45.0 million at March 29, 2003, compared with
$44.4 million at December 28, 2002. Of the total cash and cash equivalents at
March 29, 2003, $7.7 million was held by a majority-owned subsidiary, and the
remainder was held by our wholly owned subsidiaries and us. At March 29, 2003,
$28.4 million of cash and cash equivalents was held by our foreign subsidiaries.
During the first quarter of 2003, cash of $1.0 million was used in
operating activities, compared with cash provided by operating activities of
$3.2 million in the first quarter of 2002. Cash of $6.2 million was used by an
increase in unbilled contract costs and fees due to the timing of progress
billings on three large contracts. An increase in inventories used cash of $2.1
million in 2003 primarily at the Papermaking Equipment segment as a result of
our efforts to match inventory levels with increased demand, as evidenced by an
increase in bookings in the first quarter of 2003. An increase in accounts
payable provided a source of cash of $4.2 million in 2003 primarily at the
Papermaking Equipment segment due to the timing of payments. In addition, the
use of $1.0 million in cash resulted from a decrease in other accrued
liabilities, primarily due to a decrease in accrued payroll and employee
benefits as a result of employee incentive payments made in the first quarter of
2003 and the timing of payroll payments, offset in part by proceeds received
from the settlement of a forward foreign currency hedge contract.
Our investing activities used $0.9 million of cash in the first quarter
of 2003, compared with $3.5 million in the first quarter of 2002. During the
first quarter of 2003, we purchased property, plant, and equipment for $0.9
million, including $0.6 million at our composite building products business.
Our financing activities provided cash of $0.1 million in the first
quarter of 2003, compared with a use of cash of $4.0 million in the first
quarter of 2002. During the first quarter of 2003, proceeds of $0.3 million from
the issuance of common stock in connection with our employee stock purchase plan
were largely offset by the repayment of $0.2 million of a long-term note
payable.
In April 2002, our board of directors authorized the repurchase of up to
$50 million of our debt and equity securities in the open market or in
negotiated transactions. As of March 29, 2003, we had $34.6 million remaining
under this authorization, which expired on April 9, 2003.
At March 29, 2003, we had $41.1 million of unremitted foreign earnings
that could be subject to tax if remitted to the U.S. Our practice is to reinvest
indefinitely the earnings of certain of our international subsidiaries. We do
not expect that this will have a material adverse effect on our current
liquidity.
Although we currently have no material commitments for capital
expenditures, we plan to make expenditures during the remainder of 2003 for
property, plant, and equipment of approximately $3.0 million, including $1.3
million at our composite building products business. In addition, we are
exploring our options regarding significant capacity expansion for the composite
building products business either at our existing facility in Green Bay,
Wisconsin, or at a
<
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> KADANT INC.
Liquidity and Capital Resources (continued)
new location. We currently estimate that the cost of expanding our Green Bay
facility could range from $3 to $5 million, while the cost of equipping a new
facility could range from $7 to $8 million (excluding land and building). In
addition, we are in the process of establishing an assembly facility in China to
support our stock-preparation equipment business. The establishment of this
facility is still in its planning stages, with several factors remaining
undecided. We presently estimate that the facility will be operational in the
first quarter of 2004 and that the costs to establish this new facility could
range from $2 to $3 million.
In the future, our liquidity position will be primarily affected by the
level of cash flows from operations and the amount of cash expended on capital
expenditures, or on acquisitions, if any. We believe that our existing
resources, together with the cash we expect to generate from operations, are
sufficient to meet the capital requirements of our current operations for the
foreseeable future.
Risk Factors
In connection with the "safe harbor" provisions of the Private
Securities Litigation Reform Act of 1995, we wish to caution readers that the
following important factors, among others, in some cases have affected, and in
the future could affect, our actual results and could cause our actual results
in 2003 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, resulting in depressed
pulp and paper prices, decreased spending, mill closures, consolidations, and
bankruptcies, all of which have adversely affected our business. The North
American pulp and paper industry has been particularly adversely affected by
higher energy prices and a slowing economy. 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 cyclical
downturn has caused our sales to decline and has adversely affected 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.
Our business is subject to economic, currency, political, and other risks
associated with international sales and operations.
During 2002, approximately 50% of our sales were to customers outside
the United States, principally in Europe and China. International revenues are
subject to a number of risks, including the following:
- agreements may be difficult to enforce and receivables difficult to
collect through a foreign country's legal system;
- foreign customers may have longer payment cycles;
- foreign countries may impose additional withholding taxes or
otherwise tax our foreign income, impose tariffs, or adopt other
restrictions on foreign trade; and
- the protection of intellectual property in foreign countries may be
more difficult to enforce.
Although we seek to charge our customers in the same currency in which our
operating costs are incurred, fluctuations in currency exchange rates may affect
product demand and adversely affect the profitability in U.S. dollars of
products we provide in international markets where payment for our products and
services is made in their local currencies. Any of these factors could have a
material adverse impact on our business and results of operations.
<
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> KADANT INC.
Risk Factors (continued)
An increasing portion of our international sales has and may in the
future come from China. We are in the process of establishing an assembly
facility in China for our stock-preparation equipment and related aftermarket
parts. An increase in revenues, as well as operation of an assembly facility in
China, will expose us to increased risk in the event of changes in the policies
of the Chinese government, political unrest, unstable economic conditions, or
other developments in China or in U.S.-China relations that are adverse to
trade, including enactment of protectionist legislation or trade restrictions.
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. The timing of these orders is often difficult to
predict.
We are subject to intense competition in all our markets.
We believe that the principal competitive factors affecting the markets
for our products include quality, price, service, technical expertise, and
product innovation. Our competitors include a number of large multinational
corporations such as Voith Paper GmbH and Metso Corporation. Competition,
especially in China, will increase as new companies enter the market and as
existing competitors expand their product lines and 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 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 relatively 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 composite
products primarily for the building industry. Development, manufacturing, and
commercialization of our composite building products require significant
development and testing, and technical expertise in the formulation and
manufacture of the products, and our efforts may not be successful. Further,
growth of our composite building products business requires ongoing market
acceptance. We expect to incur significant branding and distribution expenses to
successfully market and distribute these products. Our ability to market these
products successfully depends on the willingness of consumers to purchase
fiber-based composite products as an alternative to traditional building
products. To penetrate the market and gain market share, we need to educate
consumers, including wood suppliers, distributors, contractors, and
homebuilders, regarding the benefits of our fiber-based composite products over
products made of wood, slate, and other traditional materials. This strategy may
not be successful. We have little 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 are successful, our capacity may
not be sufficient to meet demand without significant additional investment. In
addition, the majority of our production is largely dependent upon a single
piece of equipment. If that equipment were to fail for an extended period of
time and spare parts or replacement equipment were not readily obtainable, it
would have a material adverse effect on our revenues from this business in that
period. 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 or retain these distributors or to
add new distributors. If we are unable to distribute our products effectively,
our revenues will decline and we will have to incur additional expenses to
market these products directly.
<
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> KADANT INC.
Risk Factors (continued)
Higher interest rates could adversely affect demand for our composite building
products.
Demand for our composite building products is affected by several factors
beyond our control, including weather conditions and economic conditions. Recent
demand for our products has been driven, in part, by the availability of
low-interest mortgage and home equity loans. An increase in interest rates or
tightened credit could adversely affect demand for home remodeling projects,
including demand for our products.
Seasonality and weather conditions could adversely affect our business.
In general, the building products industry experiences seasonal
fluctuations in sales, particularly in the winter and early spring, when
holidays and adverse weather conditions in some regions usually reduce the level
of home improvement and new construction activity. In addition, our composite
building products are used or installed in outdoor construction applications,
and our sales volume, bookings, gross margins, and operating income can be
negatively affected by adverse weather conditions. As our business grows, we
would expect our performance to reflect these seasonal variations. Operating
results will tend to be lower in quarters with lower sales, which are not
entirely offset by a corresponding reduction in operating costs. In addition, we
may also experience lower gross profit margins in the fourth and first quarters
due to seasonal incentive discounts offered to our distributors. As a result of
these factors, we believe sequential period-to-period comparisons of our
operating results are not reliable indicators of future performance, and the
operating results for any one quarterly period may not be indicative of
operating results to be expected for a full year.
The failure of our composite building products to perform over long periods of
time could result in potential liabilities.
Our composite building products are new, have not been on the market for
long periods of time, and may be used in applications for which we may have
little knowledge or limited experience. Because we have limited historical
experience, we may be unable to predict the potential liabilities related to
product warranty or product liability issues. If our products fail to perform
over their warranty periods, we may not have the ability to protect ourselves
adequately against this potential liability, which could adversely affect our
operating results.
We are dependent on a single mill for the raw material used in our composite
building products and fiber-based granules, and we may not be able to obtain raw
material on commercially reasonable terms; and the manufacture of our
fiber-based granules is subject to commodity price risks.
We are dependent on a single paper mill for the fiber used in the
manufacture of our composite building products and fiber-based granules. This
mill has the exclusive right to supply the papermaking byproducts used in our
process to manufacture the granules. Although we believe our relationship with
the mill is good, the mill could decide not to renew its contract with us at the
end of 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 composite building products also contain plastic, which is
subject to wide fluctuations in pricing, quality, and availability. Due to
higher energy costs, the price of plastic has significantly increased over the
last several months. We may be unable to obtain sufficient quantities at
reasonable prices, which would adversely affect our profitability and ability to
produce a sufficient quantity of our products or to produce our products at
competitive prices.
In addition, we use natural gas in the production of our fiber-based
granular products. We manage our exposure to natural gas price fluctuations by
entering into short-term forward contracts to purchase specified quantities of
natural gas from a supplier. There can be no assurance that we will be effective
in managing our exposure to natural gas price fluctuations.
<
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> KADANT INC.
Risk Factors (continued)
Our inability to successfully identify and complete acquisitions or successfully
integrate any new or previous acquisitions could have a material adverse effect
on our business.
Our strategy includes the acquisition of technologies and businesses
that complement or augment our existing products and services. Promising
acquisitions are difficult to identify and complete for a number of reasons,
including competition among prospective buyers and the need for regulatory,
including antitrust, approvals. Any acquisition we may complete may be made at a
substantial premium over the fair value of the net assets of the acquired
company. We may not be able to complete future acquisitions, integrate any
acquired businesses successfully into our existing businesses, make such
businesses profitable, or realize anticipated cost savings or synergies, if any,
from these acquisitions.
In addition, we have previously acquired several companies and
businesses. As a result of these acquisitions, we have recorded significant
goodwill on our balance sheet, which amounts to approximately $72.0 million as
of March 29, 2003. In accordance with SFAS No. 142, we assess the carrying value
of the goodwill that we have recorded at least annually or whenever events or
changes in circumstances indicate that its current carrying value has
diminished. These events or circumstances generally would include operating
losses or a significant decline in earnings associated with the acquired
business or asset. In the first quarter of 2002, we recorded an after-tax
goodwill impairment charge upon the adoption of this standard of $32.8 million,
consisting of $29.9 million at the Papermaking Equipment segment and $2.9
million at the Composite and Fiber-based Products segment. In accordance with
SFAS No. 142, any future impairment losses identified after adoption will be
recorded as reductions to operating income, which could have a material adverse
effect on our results of operations. Our ability to realize the value of the
goodwill that we have recorded will depend on the future cash flows of these
businesses. These cash flows in turn depend, in part, on how well we have
integrated these businesses.
Our inability to protect our intellectual property could have a material adverse
effect on our business. In addition, third parties may claim that we infringe
their intellectual property, and we could suffer significant litigation or
licensing expense as a result.
We place considerable emphasis on obtaining patent and trade secret
protection for significant new technologies, products, and processes because of
the length of time and expense associated with bringing new products through the
development process and into the marketplace. Our success depends in part on our
ability to develop patentable products and obtain and enforce patent protection
for our products both in the United States and in other countries. We own
numerous U.S. and foreign patents, and we intend to file additional
applications, as appropriate, for patents covering our products. Patents may not
be issued for any pending or future patent applications owned by or licensed to
us, and the claims allowed under any issued patents may not be sufficiently
broad to protect our technology. Any issued patents owned by or licensed to us
may be challenged, invalidated, or circumvented, and the rights under these
patents may not provide us with competitive advantages. A patent relating to our
fiber-based granular products expires in 2004. After that date, we could be
subject to additional competition in this market, which could have an adverse
effect on this business. In addition, competitors may design around our
technology or develop competing technologies. Intellectual property rights may
also be unavailable or limited in some foreign countries, which could make it
easier for competitors to capture increased market position. We could incur
substantial costs to defend ourselves in suits brought against us or in suits in
which we may assert our patent rights against others. An unfavorable outcome of
any such litigation could 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.
<
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> KADANT INC.
Risk Factors (continued)
We seek to protect trade secrets and proprietary know-how, in part,
through confidentiality agreements with our collaborators, employees, and
consultants. These agreements may be breached, we may not have adequate remedies
for any breach, and our trade secrets may otherwise become known or be
independently developed by our competitors.
Third parties may assert claims against us to the effect that we are
infringing on their intellectual property rights. We could incur substantial
costs and diversion of management resources in defending these claims, which
could have a material adverse effect on our business, financial condition, and
results of operations. In addition, parties making these claims could secure a
judgment awarding substantial damages, as well as injunctive or other equitable
relief, which could effectively block our ability to make, use, sell,
distribute, or market our products and services in the United States or abroad.
In the event that a claim relating to intellectual property is asserted against
us, or third parties not affiliated with us hold pending or issued patents that
relate to our products or technology, we may seek licenses to such intellectual
property or challenge those patents. However, we may be unable to obtain these
licenses on commercially reasonable terms, if at all, and our challenge of the
patents may be unsuccessful. Our failure to obtain the necessary licenses or
other rights could 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 No. 101), which became effective in January 2000, we cannot
reliably predict future revenues and profitability, and unexpected changes may
cause us to adjust our operations. A significant portion of our costs are fixed,
due in part to our significant selling, research and development, and
manufacturing costs. Thus, small declines in revenues could disproportionately
affect our operating results. Other factors that could affect our quarterly
operating results include:
- failure of our products to pass contractually agreed upon acceptance
tests, which would delay or prohibit recognition of revenues under
SAB No. 101;
- demand for and market acceptance of our products;
- competitive pressures resulting in lower sales prices of our
products;
- adverse changes in the pulp and paper industry;
- delays or problems in our introduction of new products;
- our competitors' announcements of new products, services, or
technological innovations;
- contractual liabilities incurred by us related to guarantees of our
product performance;
- increased costs of raw materials or supplies, including the cost of
energy; and
- changes in the timing of product orders.
Anti-takeover provisions in our charter documents and under Delaware law, our
shareholder rights plan, 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
<
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> KADANT INC.
Risk Factors (continued)
- 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 agreed to indemnify 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 our 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 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 agreed to indemnify Thermo Electron, but not the shareholders of Thermo
Electron, for any resulting tax liability if the 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.
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Risk Factors (continued)
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. We may not be able to resolve any of these
potential conflicts.
Item 3 - Quantitative and Qualitative Disclosures About Market Risk
- -------------------------------------------------------------------
Our exposure to market risk from changes in interest rates and foreign
currency exchange rates has not changed materially from our exposure at year-end
2002.
Item 4 - Controls and Procedures
- --------------------------------
(a) Evaluation of Disclosure Controls and Procedures
Within the 90 days prior to the filing of this quarterly report, our
chief executive officer (CEO) and chief financial officer (CFO) performed an
evaluation of the effectiveness of the design and operation of our disclosure
controls and procedures pursuant to the Securities Exchange Act Rule 13a-14.
Based on that evaluation, our CEO and CFO concluded that our disclosure controls
and procedures are designed to ensure that information required to be disclosed
by us in the reports that we file or submit under the Exchange Act is recorded,
processed, summarized, and reported within the time periods specified in the
Securities and Exchange Commission's rules and forms and are operating in an
effective manner.
(b) Changes in Internal Controls
There have been no significant changes in our internal controls or in
other factors that could significantly affect these internal controls subsequent
to the date of the most recent evaluation performed by our CEO and CFO.
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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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized as of the 12th day of May 2003.
KADANT INC.
/s/ Thomas M. O'Brien
----------------------------------------------------
Thomas M. O'Brien
Executive Vice President and Chief Financial Officer
(Principal Financial Officer)
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CERTIFICATIONS
I, William A. Rainville, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Kadant Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: May 12, 2003 /s/ William A. Rainville
-------------------------------
William A. Rainville
Chief Executive Officer
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> KADANT INC.
CERTIFICATIONS
I, Thomas M. O'Brien, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Kadant Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: May 12, 2003 /s/ Thomas M. O'Brien
----------------------------------------------------
Thomas M. O'Brien
Executive Vice President and Chief Financial Officer
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EXHIBIT INDEX
Exhibit
Number Description of Exhibit
- --------------------------------------------------------------------------------
99 Certification of the Chief Executive Officer and the Chief Financial
Officer of the Registrant Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of Sarbanes-Oxley Act of 2002.
27