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Kadant Reports 2018 Second Quarter Results

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Reports Bookings of $176M and Record Revenue of $155M
Lowers EPS Guidance due to FX and Tariffs

WESTFORD, Mass., July 30, 2018 (GLOBE NEWSWIRE) -- Kadant Inc. (NYSE:KAI) reported its financial results for the second quarter ended June 30, 2018.

Second Quarter 2018 Highlights

  • Revenue increased 41% to a record $155 million
  • GAAP diluted EPS increased 50% to $1.08
  • Adjusted diluted EPS increased 3% to $1.07
  • Net income increased 53% to $12 million
  • Adjusted EBITDA increased 37% to $26 million and represented 17% of revenue
  • Gross margin was 44.0%
  • Bookings increased 47% to $176 million
  • Backlog increased 8% sequentially to a record $194 million
  • Cash flow from operations increased 20% to $28 million

Note: Adjusted diluted EPS, adjusted EBITDA, and adjusted EBITDA margin are non-GAAP financial measures that exclude certain items as detailed later in this press release under the heading "Use of Non-GAAP Financial Measures."

Management Commentary
"The strong start we had to 2018 continued into the second quarter with record revenue and solid EPS performance," said Jonathan Painter, president and chief executive officer. "The growth in revenue was broad-based across all our product lines and especially strong in North America. Our near-record bookings of $176 million in the second quarter benefited from the robust economy in North America, capacity build-outs in Asia, and our acquisitions. Our book-to-bill ratio for the first six months of 2018 was 1.18, driven by strong growth in bookings in our Stock-Preparation and Fluid-Handling product lines."

Second Quarter 2018 Results
Revenue increased 41 percent to a record $154.9 million compared to the second quarter of 2017, including $28.9 million from acquisitions and a $4.6 million increase from the favorable effect of foreign currency translation. Excluding the impact of acquisitions and foreign currency translation, revenue increased 10 percent compared to the second quarter of 2017. Gross margin was 44.0 percent. Net income increased 53 percent to $12.3 million, or $1.08 per diluted share, compared to $8.1 million, or $0.72 per diluted share, in the second quarter of 2017. Adjusted diluted EPS increased three percent to $1.07 compared to $1.04 in the second quarter of 2017. Adjusted diluted EPS in the second quarter of 2018 excludes a $0.05 discrete tax benefit and $0.04 of restructuring costs. Adjusted diluted EPS in the second quarter of 2017 excludes $0.32 of acquisition costs.

Adjusted EBITDA increased 37 percent to $26.1 million compared to $19.0 million in the second quarter of 2017. Adjusted EBITDA excludes $0.6 million of restructuring costs in the second quarter of 2018 and $4.1 million of acquisition costs in the second quarter of 2017. Cash flows from operations increased 20 percent to $28.4 million compared to $23.7 million in the second quarter of 2017. Bookings increased 47 percent to $176.4 million compared to $120.3 million in the second quarter of 2017, including $37.2 million from acquisitions and a $5.4 million increase from the favorable effect of foreign currency translation. Excluding the impact of acquisitions and foreign currency translation, bookings increased 11 percent compared to the second quarter of 2017.

Summary and Outlook
"The strong start to the first half of 2018 has positioned us for another record year of financial performance," Mr. Painter continued. "However, we expect headwinds from the stronger U.S. dollar and recently implemented tariffs to negatively impact our reported financial results. Since we announced our first quarter results, our full year diluted EPS guidance has been negatively impacted by an unfavorable foreign currency translation effect of $0.19 per diluted share and additional costs of $0.09 per diluted share related to the trade tariffs and, as a result, we are lowering our diluted EPS guidance for 2018. Without these negative factors, we would have raised our full year EPS guidance.

For 2018, we are raising our full year revenue guidance to $630 to $638 million, from our previous guidance of $625 to $635 million. However, we now expect to achieve GAAP diluted EPS of $4.89 to $4.99 in 2018, lowered from our previous guidance of $4.98 to $5.08. The revised 2018 guidance includes pre-tax restructuring costs of $1.5 million, or $0.10 per diluted share, pre-tax amortization expense associated with acquired backlog of $0.3 million, or $0.02 per diluted share, and a discrete tax benefit of $0.1 million, or $0.01 per diluted share. Excluding these expenses, we expect adjusted diluted EPS of $5.00 to $5.10 for 2018, lowered from our previous guidance of $5.15 to $5.25. For the third quarter of 2018, we expect GAAP diluted EPS of $1.35 to $1.40 on revenue of $162 to $166 million. The third quarter of 2018 guidance includes pre-tax restructuring costs of $0.1 million, or $0.01 per diluted share."

Conference Call
Kadant will hold a webcast with a slide presentation for investors on Tuesday, July 31, 2018, at 11:00 a.m. eastern time to discuss its second quarter performance, as well as future expectations. To access the webcast, including the slideshow and accompanying audio, go to www.kadant.com and click on "Investors". To listen to the webcast via teleconference, call 888-326-8410 within the U.S., or +1-704-385-4884 outside the U.S. and reference participant passcode 9068779. Prior to the call, our earnings release and the slides used in the webcast presentation will be filed with the Securities and Exchange Commission and will be available at www.sec.gov. An archive of the webcast presentation will be available on our website until August 31, 2018.

Shortly after the webcast, Kadant will post its updated general investor presentation incorporating the second quarter results on its website at www.kadant.com under the "Investors" section.

Use of Non-GAAP Financial Measures
In addition to the financial measures prepared in accordance with generally accepted accounting principles (GAAP), we use certain non-GAAP financial measures, including increases or decreases in revenue excluding the effect of acquisitions and foreign currency translation, adjusted operating income, adjusted net income, adjusted diluted earnings per share (EPS), earnings before interest, taxes, depreciation, and amortization (EBITDA), adjusted EBITDA, and adjusted EBITDA margin. 

We believe these non-GAAP financial measures, when taken together with the corresponding GAAP financial measures, provide meaningful supplemental information regarding our performance by excluding certain items that may not be indicative of our core business, operating results, or future outlook. We believe that the inclusion of such measures helps investors gain an understanding of our underlying operating performance and future prospects, consistent with how management measures and forecasts our performance, especially when comparing such results to previous periods or forecasts and to the performance of our competitors. Such measures are also used by us in our financial and operating decision-making and for compensation purposes. We also believe this information is responsive to investors' requests and gives them an additional measure of our performance.
           
The non-GAAP financial measures included in this press release are not meant to be considered superior to or a substitute for the results of operations prepared in accordance with GAAP. In addition, the non-GAAP financial measures included in this press release have limitations associated with their use as compared to the most directly comparable GAAP measures, in that they may be different from, and therefore not comparable to, similar measures used by other companies.

Revenue included $28.9 million and $63.6 million from acquisitions in the second quarter and first six months of 2018, respectively. Revenue also included $4.6 million and $11.4 million of favorable foreign currency translation effect in the second quarter and first six months of 2018, respectively. We present increases or decreases in revenue excluding the effect of acquisitions and foreign currency translation to provide investors insight into underlying revenue trends.
                       
Our non-GAAP financial measures exclude restructuring costs, acquisition costs, amortization expense related to acquired backlog and a discrete tax benefit. These items are excluded as they are not indicative of our core operating results and are not comparable to other periods, which have differing levels of incremental costs or income or none at all.

Second Quarter

Adjusted operating income, adjusted EBITDA, and adjusted EBITDA margin exclude:

  • Pre-tax restructuring costs of $0.6 million in 2018.
  • Pre-tax acquisition costs of $4.1 million in 2017.

Adjusted net income and adjusted diluted EPS exclude:

  • After-tax restructuring costs of $0.4 million ($0.6 million net of tax of $0.2 million) in 2018.
  • A discrete tax benefit of $0.6 million related to the repatriation of foreign earnings in 2018.
  • After-tax acquisition costs of $3.6 million ($4.1 million net of tax of $0.5 million) in 2017.

First Six Months

Adjusted operating income, adjusted EBITDA, and adjusted EBITDA margin exclude:

  • Pre-tax restructuring costs of $1.3 million in 2018.
  • Pre-tax expense related to acquired backlog of $0.3 million in 2018.
  • Pre-tax acquisition costs of $4.4 million in 2017.

Adjusted net income and adjusted diluted EPS exclude:

  • After-tax restructuring costs of $1.0 million ($1.3 million net of tax of $0.3 million) in 2018.
  • After-tax expense related to acquired backlog of $0.2 million ($0.3 million net of tax of $0.1 million) in 2018.
  • A discrete tax benefit of $0.1 million in 2018.
  • After-tax acquisition costs of $3.8 million ($4.4 million net of tax of $0.6 million) in 2017.

Reconciliations of the non-GAAP financial measures to the most directly comparable GAAP financial measures are set forth in this press release.

                       
  Financial Highlights (unaudited)                
  (In thousands, except per share amounts and percentages)                
                       
        Three Months Ended   Six Months Ended  
  Consolidated Statement of Income (a) June 30, 2018   July 1, 2017   June 30, 2018   July 1, 2017  
                       
  Revenues $ 154,913     $ 110,242     $ 304,106     $ 213,099    
                       
  Costs and Operating Expenses:                
    Cost of revenues   86,749       57,390       169,863       111,230    
    Selling, general, and administrative expenses   45,132       38,970       90,908       73,590    
    Research and development expenses   2,728       2,222       5,597       4,369    
    Restructuring costs   569       -       1,339       -    
        135,178       98,582       267,707       189,189    
                       
  Operating Income   19,735       11,660       36,399       23,910    
  Interest Income   122       102       305       206    
  Interest Expense   (1,850 )     (392 )     (3,582 )     (740 )  
  Other Expense, Net   (245 )     (217 )     (491 )     (421 )  
                       
  Income Before Provision for Income Taxes   17,762       11,153       32,631       22,955    
  Provision for Income Taxes   5,271       2,955       9,132       5,690    
                       
  Net Income   12,491       8,198       23,499       17,265    
                       
  Net Income Attributable to Noncontrolling Interest   (142 )     (102 )     (292 )     (218 )  
                       
  Net Income Attributable to Kadant $ 12,349     $ 8,096     $ 23,207     $ 17,047    
                       
  Earnings per Share Attributable to Kadant:                
      Basic $ 1.11     $ 0.74     $ 2.10     $ 1.55    
                       
      Diluted $ 1.08     $ 0.72     $ 2.04     $ 1.52    
                       
  Weighted Average Shares:                
      Basic   11,092       11,001       11,067       10,976    
                       
      Diluted   11,400       11,296       11,371       11,250    
                       
        Three Months Ended   Three Months Ended  
  Adjusted Net Income and Adjusted Diluted EPS (b) June 30, 2018   June 30, 2018   July 1, 2017   July 1, 2017  
                       
  Net Income and Diluted EPS Attributable to Kadant, as Reported $ 12,349     $ 1.08     $ 8,096     $ 0.72    
  Adjustments for the Following:                
    Restructuring Costs, Net of Tax   432       0.04       -       -    
    Acquisition Costs, Net of Tax   -       -       3,627       0.32    
    Discrete Tax Items   (574 )     (0.05 )     -       -    
                       
  Adjusted Net Income and Adjusted Diluted EPS $ 12,207     $ 1.07     $ 11,723     $ 1.04    
                       
        Six Months Ended   Six Months Ended  
        June 30, 2018   June 30, 2018   July 1, 2017   July 1, 2017  
                       
  Net Income and Diluted EPS Attributable to Kadant, as Reported $ 23,207     $ 2.04     $ 17,047     $ 1.52    
  Adjustments for the Following:                
    Restructuring Costs, Net of Tax   1,021       0.09       -       -    
    Acquisition Costs, Net of Tax   -       -       3,833       0.34    
    Amortization of Acquired Backlog, Net of Tax   189       0.02       -       -    
    Discrete Tax Items   (130 )     (0.01 )     -       -    
                       
  Adjusted Net Income and Adjusted Diluted EPS $ 24,287     $ 2.14     $ 20,880     $ 1.86    
                       
                    Increase  
                    (Decrease)  
                    Excluding  
        Three Months Ended       Acquisitions  
  Revenues by Product Line June 30, 2018   July 1, 2017   Increase   and FX (b,c)  
                       
  Stock-Preparation $ 56,376     $ 46,178     $ 10,198     $ 7,255    
  Doctoring, Cleaning, & Filtration   29,543       27,033       2,510       1,949    
  Fluid-Handling   32,531       22,520       10,011       3,823    
                       
    Papermaking Systems   118,450       95,731       22,719       13,027    
    Wood Processing Systems   33,152       11,393       21,759       (2,079 )  
    Fiber-Based Products   3,311       3,118       193       193    
                       
        $ 154,913     $ 110,242     $ 44,671     $ 11,141    
                       
                    Increase  
                    (Decrease)  
                    Excluding  
        Six Months Ended       Acquisitions  
  Revenues by Product Line June 30, 2018   July 1, 2017   Increase   and FX (b,c)  
                       
  Stock-Preparation $ 101,859     $ 87,331     $ 14,528     $ 8,129    
  Doctoring, Cleaning, & Filtration   56,765       52,383       4,382       2,620    
  Fluid-Handling   65,417       44,567       20,850       7,163    
                       
    Papermaking Systems   224,041       184,281       39,760       17,912    
    Wood Processing Systems   72,293       21,336       50,957       (2,218 )  
    Fiber-Based Products   7,772       7,482       290       290    
                       
        $ 304,106     $ 213,099     $ 91,007     $ 15,984    
                       
                    Increase  
                    (Decrease)  
                    Excluding  
        Three Months Ended       Acquisitions  
  Revenues by Geography (d) June 30, 2018   July 1, 2017   Increase   and FX (b,c)  
                       
  North America $ 75,375     $ 51,557     $ 23,818     $ 2,147    
  Europe   45,032       33,952       11,080       3,342    
  Asia   25,502       16,545       8,957       6,898    
  Rest of World   9,004       8,188       816       (1,246 )  
                       
        $ 154,913     $ 110,242     $ 44,671     $ 11,141    
                       
                    Increase  
                    (Decrease)  
                    Excluding  
        Six Months Ended       Acquisitions  
        June 30, 2018   July 1, 2017   Increase   and FX (b,c)  
                       
  North America $ 152,991     $ 101,723     $ 51,268     $ 4,264    
  Europe   86,525       66,703       19,822       1,162    
  Asia   45,650       28,443       17,207       13,290    
  Rest of World   18,940       16,230       2,710       (2,732 )  
                       
        $ 304,106     $ 213,099     $ 91,007     $ 15,984    
                       
                    Increase  
                    (Decrease)  
                    Excluding  
        Three Months Ended   Increase   Acquisitions  
  Bookings by Product Line June 30, 2018   July 1, 2017   (Decrease)   and FX (c)  
                       
  Stock-Preparation $ 61,217     $ 50,166     $ 11,051     $ 7,641    
  Doctoring, Cleaning, & Filtration   30,484       32,145       (1,661 )     (2,230 )  
  Fluid-Handling   37,922       25,207       12,715       6,201    
                       
    Papermaking Systems   129,623       107,518       22,105       11,612    
    Wood Processing Systems   44,404       10,543       33,861       1,769    
    Fiber-Based Products   2,393       2,194       199       199    
                       
        $ 176,420     $ 120,255     $ 56,165     $ 13,580    
                       
                    Increase  
                    (Decrease)  
                    Excluding  
        Six Months Ended   Increase   Acquisitions  
        June 30, 2018   July 1, 2017   (Decrease)   and FX (c)  
                       
  Stock-Preparation $ 117,732     $ 98,488     $ 19,244     $ 11,679    
  Doctoring, Cleaning, & Filtration   58,815       58,698       117       (1,747 )  
  Fluid-Handling   77,692       51,326       26,366       10,849    
                       
    Papermaking Systems   254,239       208,512       45,727       20,781    
    Wood Processing Systems   97,133       23,624       73,509       7,467    
    Fiber-Based Products   6,968       6,969       (1 )     (1 )  
                       
        $ 358,340     $ 239,105     $ 119,235     $ 28,247    
                       
        Three Months Ended   Six Months Ended  
  Business Segment Information (a) June 30, 2018   July 1, 2017   June 30, 2018   July 1, 2017  
                       
  Gross Margin:                
      Papermaking Systems   45.3 %     48.2 %     45.4 %     48.0 %  
      Wood Processing Systems   38.9 %     44.9 %     39.2 %     43.6 %  
      Fiber-Based Products   50.0 %     52.3 %     53.5 %     53.9 %  
                       
          44.0 %     47.9 %     44.1 %     47.8 %  
                       
  Operating Income:                
      Papermaking Systems $ 20,899     $ 17,264     $ 35,483     $ 31,563    
      Wood Processing Systems   5,313       (411 )     12,676       2,093    
      Corporate and Other   (6,477 )     (5,193 )     (11,760 )     (9,746 )  
                       
        $ 19,735     $ 11,660     $ 36,399     $ 23,910    
                       
  Adjusted Operating Income (b, e):                
      Papermaking Systems $ 21,468     $ 17,579     $ 36,822     $ 31,878    
      Wood Processing Systems   5,313       3,372       12,928       6,195    
      Corporate and Other   (6,477 )     (5,193 )     (11,760 )     (9,746 )  
                       
        $ 20,304     $ 15,758     $ 37,990     $ 28,327    
                       
  Capital Expenditures:                
      Papermaking Systems $ 3,840     $ 1,293     $ 8,489     $ 2,777    
      Wood Processing Systems   1,184       105       1,560       291    
      Corporate and Other   36       315       162       367    
                       
        $ 5,060     $ 1,713     $ 10,211     $ 3,435    
                       
        Three Months Ended   Six Months Ended  
  Cash Flow and Other Data June 30, 2018   July 1, 2017   June 30, 2018   July 1, 2017  
                       
  Cash Provided by Operations $ 28,355     $ 23,693     $ 35,571     $ 25,376    
  Depreciation and Amortization Expense   5,844       3,275       11,943       6,531    
                       
  Balance Sheet Data         June 30, 2018   Dec. 30, 2017  
                       
  Assets                
  Cash, Cash Equivalents, and Restricted Cash         $ 61,152     $ 76,846    
  Accounts Receivable, net           88,223       89,624    
  Inventories           96,261       84,933    
  Unbilled Revenues           2,183       2,374    
  Property, Plant and Equipment, net           79,887       79,723    
  Intangible Assets           122,242       133,036    
  Goodwill           261,488       268,001    
  Other Assets           29,750       26,557    
                       
                $ 741,186     $ 761,094    
  Liabilities and Stockholders' Equity                
  Accounts Payable         $ 35,069     $ 35,461    
  Long-term Debt           202,205       237,011    
  Capital Lease Obligations           4,691       5,069    
  Other Liabilities           157,536       151,049    
                       
    Total Liabilities           399,501       428,590    
    Stockholders' Equity           341,685       332,504    
                       
                $ 741,186     $ 761,094    
                       
  Adjusted Operating Income and Adjusted EBITDA Three Months Ended   Six Months Ended  
  Reconciliation (a, b) June 30, 2018   July 1, 2017   June 30, 2018   July 1, 2017  
                       
  Consolidated                
      Net Income Attributable to Kadant $ 12,349     $ 8,096     $ 23,207     $ 17,047    
      Net Income Attributable to Noncontrolling Interest   142       102       292       218    
      Provision for Income Taxes   5,271       2,955       9,132       5,690    
      Interest Expense, Net   1,728       290       3,277       534    
      Other Expense, Net   245       217       491       421    
                       
      Operating Income   19,735       11,660       36,399       23,910    
      Restructuring Costs   569       -       1,339       -    
      Acquisition Costs   -       4,098       -       4,417    
      Acquired Backlog Amortization (f)   -       -       252       -    
                       
      Adjusted Operating Income (b)   20,304       15,758       37,990       28,327    
      Depreciation and Amortization   5,844       3,275       11,691       6,531    
                       
      Adjusted EBITDA (b) $ 26,148     $ 19,033     $ 49,681     $ 34,858    
                       
      Adjusted EBITDA Margin (b, g)   16.9 %     17.3 %     16.3 %     16.4 %  
                       
  Papermaking Systems                
      Operating Income $ 20,899     $ 17,264     $ 35,483     $ 31,563    
      Acquisition Costs   -       315       -       315    
      Restructuring costs   569       -       1,339       -    
                       
      Adjusted Operating Income (b)   21,468       17,579       36,822       31,878    
      Depreciation and Amortization   3,139       2,618       6,275       5,211    
                       
      Adjusted EBITDA (b) $ 24,607     $ 20,197     $ 43,097     $ 37,089    
                       
  Wood Processing Systems                
      Operating Income (Loss) $ 5,313     $ (411 )   $ 12,676     $ 2,093    
      Acquisition Costs   -       3,783       -       4,102    
      Acquired Backlog Amortization (f)   -       -       252       -    
                       
      Adjusted Operating Income (b)   5,313       3,372       12,928       6,195    
      Depreciation and Amortization   2,536       506       5,080       1,020    
                       
      Adjusted EBITDA (b) $ 7,849     $ 3,878     $ 18,008     $ 7,215    
                       
  Corporate and Other                
      Operating Loss $ (6,477 )   $ (5,193 )   $ (11,760 )   $ (9,746 )  
      Depreciation and Amortization   169       151       336       300    
                       
      EBITDA $ (6,308 )   $ (5,042 )   $ (11,424 )   $ (9,446 )  
                       
                       
  (a) Prior period amounts have been restated to conform to the current period presentation as a result of the adoption of the Financial Accounting Standards Board's Accounting Standards Update No. 2017-07. 
                                       
  (b) Represents a non-GAAP financial measure. 
                       
  (c) Represents the increase (decrease) resulting from the exclusion of acquisitions and from the conversion of current period amounts reported in local currencies into U.S. dollars at the exchange rate of the prior period compared to the U.S. dollar amount reported in the prior period.
       
  (d)   Geographic revenues are attributed to regions based on customer location.
         
  (e) See reconciliation to the most directly comparable GAAP financial measure under "Adjusted Operating Income and Adjusted EBITDA Reconciliation." 
                                       
  (f) Represents intangible amortization expense associated with acquired backlog. 
       
  (g) Calculated as adjusted EBITDA divided by revenue in each period. 
     

About Kadant
Kadant Inc. is a global supplier of high-value, critical components and engineered systems used in process industries worldwide. The Company's products, technologies, and services play an integral role in enhancing process efficiency, optimizing energy utilization, and maximizing productivity in resource-intensive industries. Kadant is based in Westford, Massachusetts, with 2,500 employees in 20 countries worldwide. For more information, visit www.kadant.com.

Safe Harbor Statement
The following constitutes a "Safe Harbor" statement under the Private Securities Litigation Reform Act of 1995: This press release contains forward-looking statements that involve a number of risks and uncertainties, including forward-looking statements about our future financial and operating performance, demand for our products, and economic and industry outlook. These forward-looking statements represent Kadant's expectations as of the date of this press release. We undertake no obligation to publicly update any forward-looking statement, whether as a result of new information, future events, or otherwise. These forward-looking statements are subject to known and unknown risks and uncertainties that may cause our actual results to differ materially from these forward-looking statements as a result of various important factors, including those set forth under the heading "Risk Factors" in Kadant's annual report on Form 10-K for the year ended December 30, 2017 and subsequent filings with the Securities and Exchange Commission. These include risks and uncertainties relating to adverse changes in global and local economic conditions; the variability and difficulty in accurately predicting revenues from large capital equipment and systems projects; our customers' ability to obtain financing for capital equipment projects; the variability and uncertainties in sales of capital equipment in China; international sales and operations; the oriented strand board market and levels of residential construction activity; development and use of digital media; currency fluctuations; price increases or shortages of raw materials; dependence on certain suppliers; our acquisition strategy; failure of our information systems or breaches of data security; changes in government regulations and policies and compliance with laws; our internal growth strategy; competition; soundness of suppliers and customers; changes in our tax provision or exposure to additional tax liabilities; our ability to successfully manage our manufacturing operations; disruption in production; future restructurings; economic conditions and regulatory changes caused by the United Kingdom's likely exit from the European Union; our debt obligations; restrictions in our credit agreement; loss of key personnel; protection of patents and proprietary rights; fluctuations in our share price; soundness of financial institutions; environmental laws and regulations; anti-takeover provisions; and reliance on third-party research.

Contacts
Investor Contact Information:
Michael McKenney, 978-776-2000
mike.mckenney@kadant.com 
or
Media Contact Information:
Wes Martz, 269-278-1715
wes.martz@kadant.com 

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