kaiform10q1q2009.htm
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
____________________________________________________
FORM
10-Q
(Mark
One)
x
|
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
|
For
the quarterly period ended April 4,
2009
|
¨
|
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
|
For
the transition period from ________ to
_________
|
Commission
file number 1-11406
KADANT
INC.
(Exact
name of registrant as specified in its charter)
Delaware
|
|
52-1762325
|
(State
or Other Jurisdiction of Incorporation or Organization)
|
|
(I.R.S.
Employer Identification No.)
|
|
|
|
One
Technology Park Drive
|
|
|
Westford,
Massachusetts
|
|
01886
|
(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 (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes x No ¨
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding
12 months (or for such shorter period that the registrant was required to submit
and post such files). Yes ¨ No ¨
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
definitions of “large accelerated filer”, “accelerated filer”, and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.
Large
accelerated filer o
|
Accelerated
Filer x
|
Non-accelerated
filer o
|
Smaller
reporting company o
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes ¨ No x
Indicate
the number of shares outstanding of each of the issuer’s classes of common
stock, as of the latest practicable date.
|
|
|
|
|
|
|
Outstanding
at April 29, 2009
|
|
|
Common
Stock, $.01 par value
|
|
12,264,997
|
|
PART
I – FINANCIAL INFORMATION
Item 1 – Financial
Statements
KADANT
INC.
Condensed
Consolidated Balance Sheet
(Unaudited)
Assets
|
|
April
4,
|
|
|
January
3,
|
|
(In
thousands)
|
|
2009
|
|
|
2009
|
|
|
|
|
|
|
|
|
Current
Assets:
|
|
|
|
|
|
|
Cash and cash
equivalents
|
|
$ |
46,914 |
|
|
$ |
40,139 |
|
Accounts receivable, less
allowances of $2,944 and $2,985
|
|
|
35,744 |
|
|
|
54,517 |
|
Inventories (Note
4)
|
|
|
45,686 |
|
|
|
55,762 |
|
Unbilled contract costs and
fees
|
|
|
11,327 |
|
|
|
9,631 |
|
Other current
assets
|
|
|
12,894 |
|
|
|
16,434 |
|
Assets of discontinued
operation
|
|
|
517 |
|
|
|
524 |
|
Total
Current Assets
|
|
|
153,082 |
|
|
|
177,007 |
|
|
|
|
|
|
|
|
|
|
Property,
Plant, and Equipment, at Cost
|
|
|
100,436 |
|
|
|
103,225 |
|
Less:
accumulated depreciation and amortization
|
|
|
59,236 |
|
|
|
61,587 |
|
|
|
|
41,200 |
|
|
|
41,638 |
|
|
|
|
|
|
|
|
|
|
Other
Assets
|
|
|
42,728 |
|
|
|
43,242 |
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
|
93,537 |
|
|
|
95,030 |
|
|
|
|
|
|
|
|
|
|
Total
Assets
|
|
$ |
330,547 |
|
|
$ |
356,917 |
|
The
accompanying notes are an integral part of these condensed consolidated
financial statements.
Condensed
Consolidated Balance Sheet (continued)
(Unaudited)
Liabilities
and Shareholders’ Investment
|
|
April
4,
|
|
|
January
3,
|
|
(In
thousands, except share amounts)
|
|
2009
|
|
|
2009
|
|
|
|
|
|
|
|
|
Current
Liabilities:
|
|
|
|
|
|
|
Short-term obligations and
current maturities of long-term obligations (Note 6)
|
|
$ |
2,185 |
|
|
$ |
3,289 |
|
Accounts
payable
|
|
|
17,121 |
|
|
|
24,212 |
|
Accrued payroll and employee
benefits
|
|
|
9,995 |
|
|
|
14,475 |
|
Customer
deposits
|
|
|
7,090 |
|
|
|
11,747 |
|
Other current
liabilities
|
|
|
24,216 |
|
|
|
22,840 |
|
Liabilities of discontinued
operation
|
|
|
2,427 |
|
|
|
2,427 |
|
Total
Current Liabilities
|
|
|
63,034 |
|
|
|
78,990 |
|
|
|
|
|
|
|
|
|
|
Other
Long-Term Liabilities
|
|
|
30,566 |
|
|
|
31,412 |
|
|
|
|
|
|
|
|
|
|
Long-Term
Obligations (Note 6)
|
|
|
51,985 |
|
|
|
52,122 |
|
|
|
|
|
|
|
|
|
|
Shareholders’
Investment:
|
|
|
|
|
|
|
|
|
Preferred stock, $.01 par value,
5,000,000 shares authorized; none issued
|
|
|
– |
|
|
|
– |
|
Common stock, $.01 par value,
150,000,000 shares authorized;
14,624,159 shares
issued
|
|
|
146 |
|
|
|
146 |
|
Capital in excess of par
value
|
|
|
93,500 |
|
|
|
92,916 |
|
Retained earnings
|
|
|
149,657 |
|
|
|
152,548 |
|
Treasury stock at cost, 2,359,162
and 2,074,362 shares
|
|
|
(49,493 |
) |
|
|
(46,707 |
) |
Accumulated other comprehensive
items (Note 2)
|
|
|
(10,481 |
) |
|
|
(6,188 |
) |
Total
Kadant Shareholders’ Investment
|
|
|
183,329 |
|
|
|
192,715 |
|
Noncontrolling
interest
|
|
|
1,633 |
|
|
|
1,678 |
|
Total
Shareholders’ Investment
|
|
|
184,962 |
|
|
|
194,393 |
|
|
|
|
|
|
|
|
|
|
Total
Liabilities and Shareholders’ Investment
|
|
$ |
330,547 |
|
|
$ |
356,917 |
|
The
accompanying notes are an integral part of these condensed consolidated
financial statements.
Condensed
Consolidated Statement of Operations
(Unaudited)
|
|
Three
Months Ended
|
|
|
|
April
4,
|
|
|
March
29,
|
|
(In
thousands, except per share amounts)
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
Revenues
|
|
$ |
64,957 |
|
|
$ |
85,864 |
|
|
|
|
|
|
|
|
|
|
Costs
and Operating Expenses:
|
|
|
|
|
|
|
|
|
Cost of
revenues
|
|
|
40,317 |
|
|
|
51,804 |
|
Selling, general, and
administrative expenses
|
|
|
22,205 |
|
|
|
25,369 |
|
Research and development
expenses
|
|
|
1,470 |
|
|
|
1,608 |
|
Restructuring costs and other
income, net
|
|
|
757 |
|
|
|
(473 |
) |
|
|
|
64,749 |
|
|
|
78,308 |
|
|
|
|
|
|
|
|
|
|
Operating
Income
|
|
|
208 |
|
|
|
7,556 |
|
|
|
|
|
|
|
|
|
|
Interest
Income
|
|
|
207 |
|
|
|
541 |
|
Interest
Expense
|
|
|
(813 |
) |
|
|
(595 |
) |
|
|
|
|
|
|
|
|
|
(Loss)
Income from Continuing Operations Before Provision for Income
Taxes
|
|
|
(398 |
) |
|
|
7,502 |
|
Provision
for Income Taxes
|
|
|
2,464 |
|
|
|
2,288 |
|
|
|
|
|
|
|
|
|
|
(Loss)
Income from Continuing Operations
|
|
|
(2,862 |
) |
|
|
5,214 |
|
Loss
from Discontinued Operation (net of income tax benefit of $3 and
$3)
|
|
|
(4 |
) |
|
|
(4 |
) |
|
|
|
|
|
|
|
|
|
Net
(Loss) Income
|
|
|
(2,866 |
) |
|
|
5,210 |
|
|
|
|
|
|
|
|
|
|
Net
Income Attributable to Noncontrolling Interest
|
|
|
(25 |
) |
|
|
(97 |
) |
|
|
|
|
|
|
|
|
|
Net
(Loss) Income Attributable to Kadant
|
|
$ |
(2,891 |
) |
|
$ |
5,113 |
|
|
|
|
|
|
|
|
|
|
Amounts
Attributable to Kadant:
|
|
|
|
|
|
|
|
|
(Loss)
Income from Continuing Operations
|
|
$ |
(2,887 |
) |
|
$ |
5,117 |
|
Loss
from Discontinued Operation
|
|
|
(4 |
) |
|
|
(4 |
) |
Net
(Loss) Income Attributable to Kadant
|
|
$ |
(2,891 |
) |
|
$ |
5,113 |
|
|
|
|
|
|
|
|
|
|
(Loss)
Earnings per Share from Continuing Operations (Note 3):
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
(.23 |
) |
|
$ |
.36 |
|
Diluted
|
|
$ |
(.23 |
) |
|
$ |
.36 |
|
|
|
|
|
|
|
|
|
|
(Loss)
Earnings per Share Attributable to Kadant (Note 3):
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
(.23 |
) |
|
$ |
.36 |
|
Diluted
|
|
$ |
(.23 |
) |
|
$ |
.36 |
|
|
|
|
|
|
|
|
|
|
Weighted
Average Shares (Note 3):
|
|
|
|
|
|
|
|
|
Basic
|
|
|
12,506 |
|
|
|
14,167 |
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
12,506 |
|
|
|
14,273 |
|
|
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of these condensed consolidated
financial statements.
Condensed
Consolidated Statement of Cash Flows
(Unaudited)
|
|
Three
Months Ended
|
|
|
|
April
4,
|
|
|
March
29,
|
|
(In
thousands)
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
Operating
Activities:
|
|
|
|
|
|
|
Net
(loss) income attributable to Kadant
|
|
$ |
(2,891 |
) |
|
$ |
5,113 |
|
Net
income attributable to noncontrolling interest
|
|
|
25 |
|
|
|
97 |
|
Loss
from discontinued operation
|
|
|
4 |
|
|
|
4 |
|
(Loss)
income from continuing operations
|
|
|
(2,862 |
) |
|
|
5,214 |
|
Adjustments to reconcile (loss)
income from continuing operations to net cash provided by operating
activities:
|
|
|
|
|
|
|
|
|
Depreciation and
amortization
|
|
|
1,843 |
|
|
|
1,858 |
|
Stock-based compensation
expense
|
|
|
683 |
|
|
|
731 |
|
Gain on the sale of property,
plant, and equipment
|
|
|
(11 |
) |
|
|
(652 |
) |
Provision for losses on
(recovery of) accounts receivable
|
|
|
528 |
|
|
|
(6 |
) |
Other, net
|
|
|
(981 |
) |
|
|
289 |
|
Changes in current accounts,
net of effects of acquisition:
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
17,348 |
|
|
|
8,265 |
|
Unbilled contract costs and
fees
|
|
|
(2,032 |
) |
|
|
521 |
|
Inventories
|
|
|
9,020 |
|
|
|
(4,489 |
) |
Other current
assets
|
|
|
2,808 |
|
|
|
(280 |
) |
Accounts
payable
|
|
|
(6,463 |
) |
|
|
444 |
|
Other current
liabilities
|
|
|
(6,114 |
) |
|
|
(5,567 |
) |
Net cash provided by continuing
operations
|
|
|
13,767 |
|
|
|
6,328 |
|
Net cash provided by
discontinued operation
|
|
|
3 |
|
|
|
3 |
|
Net cash provided by operating
activities
|
|
|
13,770 |
|
|
|
6,331 |
|
|
|
|
|
|
|
|
|
|
Investing
Activities:
|
|
|
|
|
|
|
|
|
Purchases of property, plant,
and equipment
|
|
|
(1,157 |
) |
|
|
(1,610 |
) |
Acquisition
|
|
|
– |
|
|
|
(1,197 |
) |
Proceeds from sale of property,
plant, and equipment
|
|
|
31 |
|
|
|
887 |
|
Other, net
|
|
|
– |
|
|
|
7 |
|
Net cash used in continuing
operations for investing activities
|
|
|
(1,126 |
) |
|
|
(1,913 |
) |
|
|
|
|
|
|
|
|
|
Financing
Activities:
|
|
|
|
|
|
|
|
|
Proceeds from issuance of
long-term obligations
|
|
|
17,000 |
|
|
|
28,000 |
|
Repayments of long-term
obligations
|
|
|
(18,224 |
) |
|
|
(25,974 |
) |
Purchases of Company common
stock
|
|
|
(3,341 |
) |
|
|
(12,004 |
) |
Proceeds from issuances of
Company common stock
|
|
|
– |
|
|
|
725 |
|
Other, net
|
|
|
6 |
|
|
|
(617 |
) |
Net cash used in continuing
operations for financing activities
|
|
|
(4,559 |
) |
|
|
(9,870 |
) |
|
|
|
|
|
|
|
|
|
Exchange
Rate Effect on Cash and Cash Equivalents
|
|
|
(1,310 |
) |
|
|
2,426 |
|
|
|
|
|
|
|
|
|
|
Increase
(Decrease) in Cash and Cash Equivalents
|
|
|
6,775 |
|
|
|
(3,026 |
) |
Cash
and Cash Equivalents at Beginning of Period
|
|
|
40,139 |
|
|
|
61,553 |
|
Cash
and Cash Equivalents at End of Period
|
|
$ |
46,914 |
|
|
$ |
58,527 |
|
|
|
|
|
|
|
|
|
|
Non-cash
Financing Activities:
|
|
|
|
|
|
|
|
|
Issuance
of Company common stock
|
|
$ |
39 |
|
|
$ |
122 |
|
|
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of these condensed consolidated
financial statements.
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”), are unaudited, 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 April 4, 2009, and its results of operations and
cash flows for the three-month periods ended April 4, 2009 and March 29, 2008.
Interim results are not necessarily indicative of results for a full
year.
The condensed consolidated balance
sheet presented as of January 3, 2009, has been derived from
the consolidated financial statements that have been audited by the
Company’s independent registered public accounting firm. 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
consolidated financial statements and related notes of the Company. The
condensed consolidated financial statements and notes included herein should be
read in conjunction with the consolidated financial statements and related notes
included in the Company’s Annual Report on Form 10-K for the fiscal year ended
January 3, 2009, filed with the Securities and Exchange Commission.
Certain prior-period amounts have been
reclassified to conform to the 2009 presentation, including the adoption of a
new accounting standard. See Note 16 for further information.
2. Comprehensive
(Loss) Income
Comprehensive (loss) income
attributable to Kadant combines net (loss) income, other comprehensive items,
and comprehensive income (loss) attributable to noncontrolling interest. Other
comprehensive items represent certain amounts that are reported as components of
shareholders’ investment in the accompanying condensed consolidated balance
sheet, including foreign currency translation adjustments, deferred gains and
losses and unrecognized prior service loss associated with pension and other
post-retirement plans, and deferred gains and losses on hedging instruments. The
components of comprehensive (loss) income attributable to Kadant are as
follows:
|
|
Three
Months Ended
|
|
|
|
April
4,
|
|
|
March
29,
|
|
(In
thousands)
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
Net
(Loss) Income
|
|
$ |
(2,866 |
) |
|
$ |
5,210 |
|
|
|
|
|
|
|
|
|
|
Other
Comprehensive Items:
|
|
|
|
|
|
|
|
|
Foreign Currency Translation
Adjustment
|
|
|
(4,257 |
) |
|
|
7,874 |
|
Pension and Other Post-Retirement Liability Adjustments, net (net of
income tax of $21 and $54 in 2009
and
2008, respectively)
|
|
|
(41 |
) |
|
|
(95 |
) |
Deferred (Loss) Gain on Hedging Instruments (net of income tax of $98 and
$61 in 2009 and 2008,
respectively)
|
|
|
(65 |
) |
|
|
238 |
|
|
|
|
(4,363 |
) |
|
|
8,017 |
|
Comprehensive
(Loss) Income
|
|
|
(7,229 |
) |
|
|
13,227 |
|
Comprehensive
Income (Loss) Attributable to Noncontrolling Interest
|
|
|
45 |
|
|
|
(226 |
) |
Comprehensive
(Loss) Income Attributable to Kadant
|
|
$ |
(7,184 |
) |
|
$ |
13,001 |
|
Notes to
Condensed Consolidated Financial Statements
(Unaudited)
3. (Loss)
Earnings per Share
Basic and diluted (loss) earnings per
share are calculated as follows:
|
|
Three
Months Ended
|
|
|
|
April
4,
|
|
|
March
29,
|
|
(In
thousands, except per share amounts)
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
Amounts
Attributable to Kadant:
|
|
|
|
|
|
|
(Loss)
Income from Continuing Operations
|
|
$ |
(2,887 |
) |
|
$ |
5,117 |
|
Loss
from Discontinued Operation
|
|
|
(4 |
) |
|
|
(4 |
) |
Net
(Loss) Income
|
|
$ |
(2,891 |
) |
|
$ |
5,113 |
|
|
|
|
|
|
|
|
|
|
Basic
Weighted Average Shares
|
|
|
12,506 |
|
|
|
14,167 |
|
Effect
of Stock Options, Restricted Stock Awards and Employee Stock Purchase
Plan
|
|
|
– |
|
|
|
106 |
|
Diluted
Weighted Average Shares
|
|
|
12,506 |
|
|
|
14,273 |
|
|
|
|
|
|
|
|
|
|
Basic
(Loss) Earnings per Share:
|
|
|
|
|
|
|
|
|
Continuing
Operations
|
|
$ |
(.23 |
) |
|
$ |
.36 |
|
Discontinued
Operation
|
|
|
– |
|
|
|
– |
|
Net (Loss)
Income
|
|
$ |
(.23 |
) |
|
$ |
.36 |
|
|
|
|
|
|
|
|
|
|
Diluted
(Loss) Earnings per Share:
|
|
|
|
|
|
|
|
|
Continuing
Operations
|
|
$ |
(.23 |
) |
|
$ |
.36 |
|
Discontinued
Operation
|
|
|
– |
|
|
|
– |
|
Net (Loss)
Income
|
|
$ |
(.23 |
) |
|
$ |
.36 |
|
Options to purchase approximately
75,700 and 55,500 shares of common stock for the first quarters of 2009 and
2008, 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 the effect of their inclusion would have been
anti-dilutive. In addition, the dilutive effect of restricted stock units
totaling 117,000 shares of common stock was not included in the computation of
diluted (loss) earnings per share in the first quarter of 2009 as the effect
would have been anti-dilutive.
4. Inventories
The components of inventories are as
follows:
|
|
April
4,
|
|
|
January
3,
|
|
(In
thousands)
|
|
2009
|
|
|
2009
|
|
Raw
Materials and Supplies
|
|
$ |
19,540 |
|
|
$ |
21,687 |
|
Work
in Process
|
|
|
7,488 |
|
|
|
16,230 |
|
Finished
Goods
|
|
|
18,658 |
|
|
|
17,845 |
|
|
|
$ |
45,686 |
|
|
$ |
55,762 |
|
5. Income
Taxes
The
provision for income taxes was $2,464,000 and $2,288,000 in the first quarters
of 2009 and 2008, respectively. The provision for income taxes in the first
quarter of 2009 included income tax expense of $1,134,000 associated with
earnings from the Company's foreign operations and income tax expense of
$1,178,000 associated with applying a valuation allowance to certain deferred
tax assets. The provision for income taxes of $2,464,000 in the
first quarter of 2009 does not include a tax benefit of $1,405,000, as
the Company was not able to record a tax benefit on its U.S. pre-tax losses
due to its accumulated loss position in the U.S. tax jurisdiction and the
uncertainty of profitability in future periods.
Notes to
Condensed Consolidated Financial Statements
(Unaudited)
6. Short-
and Long-Term Obligations
Short-
and Long-term Obligations
Short- and Long-term obligations are as
follows:
|
|
April
4,
|
|
|
January
3,
|
|
(In
thousands)
|
|
2009
|
|
|
2009
|
|
|
|
|
|
|
|
|
Revolving
Credit Facility
|
|
$ |
38,000 |
|
|
$ |
38,000 |
|
Variable
Rate Term Loan, due from 2009 to 2016
|
|
|
8,625 |
|
|
|
8,750 |
|
Variable
Rate Term Loan, due from 2010 to 2011
|
|
|
5,860 |
|
|
|
5,872 |
|
Short-Term
Obligation under Kadant Jining Credit Facilities
|
|
|
1,685 |
|
|
|
2,789 |
|
Total
Short- and Long-Term Obligations
|
|
|
54,170 |
|
|
|
55,411 |
|
Less:
Short-Term Obligations and Current Maturities
|
|
|
(2,185 |
) |
|
|
(3,289 |
) |
Long-Term
Obligations, less Current Maturities
|
|
$ |
51,985 |
|
|
$ |
52,122 |
|
The weighted
average interest rate for long-term obligations was 3.41% as of April 4,
2009.
Revolving
Credit Facility
On
February 13, 2008, the Company entered into a five-year unsecured revolving
credit facility (2008 Credit Agreement) in the aggregate principal amount of up
to $75,000,000, which includes an uncommitted unsecured incremental borrowing
facility of up to an additional $75,000,000. The Company can borrow up to
$75,000,000 under the 2008 Credit Agreement with a sublimit of $60,000,000
within the 2008 Credit Agreement available for the issuances of letters of
credit and bank guarantees. The principal on any borrowings made under the 2008
Credit Agreement is due on February 13, 2013. As of April 4, 2009, the
outstanding balance on the 2008 Credit Agreement was $38,000,000 and the Company
had $33,474,000 of borrowing capacity available under the committed portion of
the 2008 Credit Agreement.
The
obligations of the Company under the 2008 Credit Agreement may be accelerated
upon the occurrence of an event of default under the 2008 Credit Agreement,
which includes customary events of default including without limitation payment
defaults, defaults in the performance of affirmative and negative covenants, the
inaccuracy of representations or warranties, bankruptcy and insolvency related
defaults, defaults relating to such matters as the Employment Retirement Income
Security Act (ERISA),
uninsured judgments and the failure to pay certain indebtedness, and a change of
control default.
The
2008 Credit Agreement contains negative covenants applicable to the Company and
its subsidiaries, including financial covenants requiring the Company to comply
with a maximum consolidated leverage ratio of 3.5 and a minimum consolidated
fixed charge coverage ratio of 1.2, and restrictions on liens, indebtedness,
fundamental changes, dispositions of property, making certain restricted
payments (including dividends and stock repurchases), investments, transactions
with affiliates, sale and leaseback transactions, swap agreements, changing its
fiscal year, arrangements affecting subsidiary distributions, entering into new
lines of business, and certain actions related to the discontinued operation. As
of April 4, 2009, the Company was in compliance with these
covenants.
Commercial
Real Estate Loan
On
May 4, 2006, the Company borrowed $10,000,000 under a promissory note (2006
Commercial Real Estate Loan), which is repayable in quarterly installments of
$125,000 over a ten-year period with the remaining principal balance of
$5,000,000 due upon maturity. As of April 4, 2009, the remaining balance on the
2006 Commercial Real Estate Loan was $8,625,000.
The
Company’s obligations under the 2006 Commercial Real Estate Loan may be
accelerated upon the occurrence of an event of default under the 2006 Commercial
Real Estate Loan and the related Mortgage and Security Agreements, which include
customary events of default including without limitation payment defaults,
defaults in the performance of covenants and obligations, the inaccuracy of
representations or warranties, bankruptcy- and insolvency-related defaults,
liens on the properties or collateral and uninsured judgments. In addition, the
occurrence of an event of default under the 2008 Credit Agreement or any
successor credit facility would be an event of default under the 2006 Commercial
Real Estate Loan.
Notes to
Condensed Consolidated Financial Statements
(Unaudited)
6. Short-
and Long-Term Obligations (continued)
Kadant
Jining Loan and Credit Facilities
On
January 28, 2008, the Company’s Kadant Jining subsidiary (Kadant Jining)
borrowed 40 million Chinese renminbi, or approximately $5,860,000 at the April
4, 2009 exchange rate (2008 Kadant Jining Loan). Principal on the 2008 Kadant
Jining Loan is due as follows: 24 million Chinese renminbi, or approximately
$3,516,000, on January 28, 2010 and 16 million Chinese renminbi, or
approximately $2,344,000, on January 28, 2011.
On
July 30, 2008, Kadant Jining and the Company’s Kadant Yanzhou subsidiary
(Kadant Yanzhou) each entered into a short-term credit line facility agreement
(2008 Facilities) that would allow Kadant Jining to borrow up to an aggregate
principal amount of 45 million Chinese renminbi, or approximately
$6,593,000 at the April 4, 2009 exchange rate, and Kadant Yanzhou to borrow up
to an aggregate principal amount of 15 million Chinese renminbi, or
approximately $2,198,000 at the April 4, 2009 exchange rate. The 2008 Facilities
have a term of 364 days and are renewable annually on or before July 30 at
the discretion of the lender. As of April 4, 2009, Kadant Jining had borrowed
$1,685,000 and Kadant Jining and Yanzhou had $7,106,000 of borrowing capacity
available under the 2008 Facilities.
7. Warranty
Obligations
The
Company provides for the estimated cost of product warranties at the time of
sale based on the actual historical return rates and repair costs. In the Pulp
and Papermaking Systems (Papermaking Systems) segment, the Company typically
negotiates the terms regarding warranty coverage and length of warranty
depending on the products and applications. 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 estimates, revisions to the estimated warranty liability would be
required.
The
changes in the carrying amount of the Company’s product warranties included in
other current liabilities in the accompanying condensed consolidated balance
sheet are as follows:
|
|
Three
Months Ended
|
|
(In
thousands)
|
|
April
4, 2009
|
|
|
|
|
|
Balance
at Beginning of Period
|
|
$ |
3,671 |
|
Provision charged to
income
|
|
|
195 |
|
Usage
|
|
|
(582 |
) |
Currency
translation
|
|
|
(60 |
) |
Balance
at End of Period
|
|
$ |
3,224 |
|
|
|
|
|
|
See Note 17 for warranty information
related to the discontinued operation.
Notes to
Condensed Consolidated Financial Statements
(Unaudited)
8. Restructuring
Costs and Other Income, Net
2008
Restructuring Plan
The
Company recorded additional restructuring costs, which consisted of severance
and associated costs of $34,000, in the first quarter of 2009 associated with
its 2008 Restructuring Plan.
2009
Restructuring Plan
The
Company recorded restructuring costs of $723,000 in the first quarter of 2009
associated with its 2009 Restructuring Plan, which consisted of severance and
associated costs related to the reduction of 43 full-time positions in China,
the U.S., and France, all at its Papermaking Systems segment. These actions were
taken to adjust the Company’s cost structure and streamline its operations in
response to the continued weak economic environment.
A summary
of the changes in accrued restructuring costs, of which $2,117,000 is included
in other current liabilities and $589,000 is included in other long-term
liabilities as of April 4, 2009 in the accompanying condensed consolidated
balance sheet, is as follows:
(In
thousands)
|
|
Severance
Costs
|
|
|
|
|
|
2008
Restructuring Plan
|
|
|
|
Balance at January 3,
2009
|
|
$ |
2,872 |
|
Provision
|
|
|
34 |
|
Payments
|
|
|
(544 |
) |
Currency
translation
|
|
|
(3 |
) |
Balance at April 4,
2009
|
|
$ |
2,359 |
|
|
|
|
|
|
2009
Restructuring Plan
|
|
|
|
|
Balance at January 3,
2009
|
|
$ |
– |
|
Provision
|
|
|
723 |
|
Payments
|
|
|
(380 |
) |
Currency
translation
|
|
|
4 |
|
Balance at April 4,
2009
|
|
$ |
347 |
|
The
Company expects to pay the remaining accrued restructuring costs as follows:
$2,117,000 in 2009 and $589,000 from 2010 to 2015.
Other
Income
In the
first quarter of 2008, the Company sold real estate in France for $746,000,
resulting in a pre-tax gain of $594,000 on the sale.
Notes to
Condensed Consolidated Financial Statements
(Unaudited)
9. Business
Segment Information
The
Company has combined its operating entities into one reportable operating
segment, Papermaking Systems, and a separate product line, Fiber-based Products,
which is reported in Other. In classifying operational entities into a
particular segment, the Company aggregated businesses with similar economic
characteristics, products and services, production processes, customers, and
methods of distribution.
|
|
Three
Months Ended
|
|
|
|
April
4,
|
|
|
March
29,
|
|
(In
thousands)
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
Papermaking
Systems
|
|
$ |
61,987 |
|
|
$ |
83,258 |
|
Other
|
|
|
2,970 |
|
|
|
2,606 |
|
|
|
$ |
64,957 |
|
|
$ |
85,864 |
|
|
|
|
|
|
|
|
|
|
(Loss)
Income from Continuing Operations Before Provision for Income
Taxes:
|
|
|
|
|
|
|
|
|
Papermaking
Systems
|
|
$ |
2,882 |
|
|
$ |
10,878 |
|
Corporate and Other
(a)
|
|
|
(2,674 |
) |
|
|
(3,322 |
) |
Total Operating
Income
|
|
|
208 |
|
|
|
7,556 |
|
Interest Expense,
Net
|
|
|
(606 |
) |
|
|
(54 |
) |
|
|
$ |
(398 |
) |
|
$ |
7,502 |
|
|
|
|
|
|
|
|
|
|
Capital
Expenditures:
|
|
|
|
|
|
|
|
|
Papermaking
Systems
|
|
$ |
1,112 |
|
|
$ |
1,425 |
|
Corporate and
Other
|
|
|
45 |
|
|
|
185 |
|
|
|
$ |
1,157 |
|
|
$ |
1,610 |
|
(a) Corporate
primarily includes general and administrative expenses.
10. Stock-Based
Compensation
Restricted
Stock Units
On
March 4, 2009, the Company granted an aggregate of 20,000 restricted stock
units (RSUs) to its outside directors with an aggregate fair value of $157,000,
which will vest at a rate of 5,000 shares per quarter on the last day of each
quarter in 2009. On March 4, 2009, the Company also granted to its outside
directors an aggregate of 40,000 RSUs with an aggregate fair value of $314,000,
which will only vest and compensation expense will only be recognized upon a
change in control as defined in the Company’s 2006 equity incentive plan. The
40,000 RSUs will be forfeited if a change in control does not occur prior to the
end of the first quarter of 2010.
On
March 3, 2008, the Company granted an aggregate of 40,000 RSUs to its
outside directors with an aggregate fair value of $975,000, which only would
have vested and compensation expense would have been recognized upon a change in
control prior to the end of the first quarter of 2009, as defined in the
Company’s 2006 equity incentive plan. The 40,000 RSUs were forfeited at the end
of the first quarter of 2009 and no compensation expense was
recognized.
Notes to
Condensed Consolidated Financial Statements
(Unaudited)
10. Stock-Based
Compensation (continued)
Performance-Based
Restricted Stock Units
On
March 3, 2009, the Company granted to certain officers of the Company
performance-based RSUs, which represent, in aggregate, the right to receive
92,500 shares (the target RSU amount), subject to adjustment, with a grant date
fair value of $8.47 per share. The RSUs will cliff vest in their entirety on the
last day of the Company’s 2011 fiscal year, provided that the officer remains
employed by the Company through the vesting date. The target RSU amount is
subject to adjustment based on the achievement of a specified EBITDA target
generated from continuing operations for the 2009 fiscal year.
The
performance-based RSU agreements provide for forfeiture in certain events, such
as voluntary or involuntary termination of employment, and for acceleration of
vesting in certain events, such as death, disability or a change in control of
the Company. If the officer dies or is disabled prior to the vesting date, then
a ratable portion of the RSUs will vest. If a change in control occurs prior to
the end of the performance period, the officer will receive the target RSU
amount; otherwise, the officer will receive the number of deliverable RSUs based
on the achievement of the performance goal, as stated in the RSU
agreements.
Each
performance-based RSU represents the right to receive one share of the Company’s
common stock upon vesting. The Company is recognizing compensation expense
associated with performance-based RSUs ratably over the vesting period based on
the grant date fair value. Compensation expense of $490,000 and $417,000 was
recognized in the first quarter of 2009 and 2008, respectively, associated with
performance-based RSUs. Unrecognized compensation expense related to the
unvested performance-based RSUs totaled approximately $2,575,000 at April 4,
2009, and will be recognized over a weighted average period of 1.6
years.
Time-Based
Restricted Stock Units
The
Company granted time-based RSUs in prior periods to certain employees of the
Company. Each time-based RSU represents the right to receive one share of the
Company’s common stock upon vesting. The Company is recognizing compensation
expense associated with these time-based RSUs ratably over the vesting period
based on the grant date fair value. Compensation expense of $106,000 and
$114,000, respectively, was recognized in the first quarter of 2009 and 2008
associated with time-based RSUs. Unrecognized compensation expense related to
the time-based RSUs totaled approximately $1,106,000 as of April 4, 2009, and
will be recognized over a weighted average period of 2.4 years.
A summary
of the changes in the Company’s unvested RSUs for the first quarter of 2009 is
as follows:
|
|
Units
(In
thousands)
|
|
|
Weighted
Average Grant-Date Fair Value
|
|
|
|
|
|
|
|
|
Unvested RSUs
at January 3, 2009
|
|
|
294 |
|
|
$ |
27.05 |
|
Granted
|
|
|
153 |
|
|
$ |
8.23 |
|
Vested
|
|
|
(5 |
) |
|
$ |
7.85 |
|
Forfeited
/ Expired
|
|
|
(42 |
) |
|
$ |
24.53 |
|
Unvested RSUs
at April 4, 2009
|
|
|
400 |
|
|
$ |
20.37 |
|
Notes to
Condensed Consolidated Financial Statements
(Unaudited)
11. Employee
Benefit Plans
Defined
Benefit Pension Plans and Post-Retirement Welfare Benefits Plans
The Company’s Kadant Web Systems subsidiary has a noncontributory defined
benefit retirement plan. Benefits under the plan are based on years of service
and employee compensation. Funds are contributed to a trustee as necessary to
provide for current service and for any unfunded projected benefit obligation
over a reasonable period. Effective December 31, 2005, this plan was closed
to new participants. This same subsidiary also has a post-retirement welfare
benefits plan (included in the table below in “Other Benefits”). No future
retirees are eligible for this post-retirement welfare benefits
plan.
The
Company’s Kadant Lamort subsidiary sponsors a defined benefit pension plan
(included in the table below in “Other Benefits”). Benefits under this plan are
based on years of service and projected employee compensation.
The
Company’s Kadant Johnson subsidiary also offers a post-retirement welfare
benefits plan (included in the table below in “Other Benefits”) to its U.S.
employees upon attainment of eligible retirement age. This plan will be closed
to employees who will not meet its retirement eligibility requirements on
January 1, 2012.
The
components of the net periodic benefit cost (income) for the pension benefits
and other benefits plans in the first quarters of 2009 and 2008 are as
follows:
|
|
Three
Months Ended
|
|
|
Three
Months Ended
|
|
(In
thousands)
|
|
April
4, 2009
|
|
|
March
29, 2008
|
|
|
|
Pension Benefits
|
|
|
Other
Benefits
|
|
|
Pension
Benefits
|
|
|
Other
Benefits
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Components
of Net Periodic Benefit Cost (Income):
|
|
|
|
|
|
|
|
|
|
|
Service cost
|
|
$ |
205 |
|
|
$ |
35 |
|
|
$ |
216 |
|
|
$ |
21 |
|
Interest cost
|
|
|
330 |
|
|
|
60 |
|
|
|
297 |
|
|
|
63 |
|
Expected return on plan
assets
|
|
|
(324 |
) |
|
|
– |
|
|
|
(368 |
) |
|
|
– |
|
Recognized net actuarial
loss
|
|
|
124 |
|
|
|
– |
|
|
|
11 |
|
|
|
– |
|
Amortization of prior service
cost (income)
|
|
|
14 |
|
|
|
(183 |
) |
|
|
14 |
|
|
|
(198 |
) |
Net
periodic benefit cost (income)
|
|
$ |
349 |
|
|
$ |
(88 |
) |
|
$ |
170 |
|
|
$ |
(114 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
weighted-average assumptions used to determine net periodic benefit cost
(income) are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount
rate
|
|
|
6.25 |
% |
|
|
6.10 |
% |
|
|
6.00 |
% |
|
|
5.90 |
% |
Expected
long-term return on plan assets
|
|
|
8.50 |
% |
|
|
– |
|
|
|
8.50 |
% |
|
|
– |
|
Rate
of compensation increase
|
|
|
4.00 |
% |
|
|
2.00 |
% |
|
|
4.00 |
% |
|
|
2.00 |
% |
The
Company made a $1,200,000 cash contribution to the Kadant Web Systems
noncontributory defined benefit retirement plan in the first quarter of 2009 and
expects to make three quarterly cash contributions of $1,200,000 each over the
remainder of 2009. For the remaining pension and post-retirement welfare
benefits plans, no cash contributions other than the funding of current benefit
payments are expected in 2009.
Notes to
Condensed Consolidated Financial Statements
(Unaudited)
12. Derivatives
The
Company uses derivative instruments primarily to reduce its exposure to currency
exchange and interest rate risk. The Company accounts for such instruments in
accordance with Statement of Financial Accounting Standards (SFAS) No. 133,
“Accounting for Derivative Instruments and Hedging Activities” (SFAS 133), as
amended. When the Company enters into a derivative contract, it makes a
determination as to whether the transaction is deemed to be a hedge for
accounting purposes. For a contract deemed to be a hedge, the Company formally
documents the relationship between the derivative instrument and the risk being
hedged. In this documentation, the Company specifically identifies the asset,
liability, forecasted transaction, cash flow, or net investment that has been
designated as the hedged item, and evaluates whether the derivative instrument
is expected to reduce the risks associated with the hedged item. To the extent
these criteria are not met, the Company does not use hedge accounting for the
derivative instrument. The changes in the fair value of a derivative not deemed
to be a hedge are recorded currently in earnings. The Company does not hold
or engage in transactions involving derivative instruments for purposes other
than risk management.
Interest
Rate Swaps
The
Company entered into interest rate swap agreements in 2008 and 2006 to hedge its
exposure to variable-rate debt and has designated these agreements as cash flow
hedges. On February 13, 2008, the Company entered into a swap agreement (2008
Swap Agreement) to hedge the exposure to movements in the 3-month LIBOR rate on
future outstanding debt. The 2008 Swap Agreement has a five-year term and a
$15,000,000 notional value, which decreases to $10,000,000 on December 31, 2010,
and $5,000,000 on December 30, 2011. Under the 2008 Swap Agreement, on a
quarterly basis the Company will receive a 3-month LIBOR rate and pay a fixed
rate of interest of 3.265% plus the applicable margin. The Company entered into
a swap agreement in 2006 to convert a portion of the Company’s outstanding debt
from floating to fixed rates of interest. The swap agreement has the same terms
and quarterly payment dates as the corresponding debt, and reduces
proportionately in line with the amortization of the debt. The fair values for
these instruments as of April 4, 2009, are included in other liabilities with an
offset to accumulated other comprehensive items (net of tax) in the accompanying
condensed consolidated balance sheet. The Company has structured these interest
rate swap agreements to be 100% effective and as a result, there is no current
impact to earnings resulting from hedge ineffectiveness. Management believes
that any credit risk associated with the swap agreements is remote based on the
creditworthiness of the financial institution issuing the swap
agreements.
The counterparty to the swap agreement could demand an early termination of the
swap agreement if the Company is in default under the 2008 Credit Agreement, or
any agreement that amends or replaces the 2008 Credit Agreement in which the
counterparty is a member, and the Company is unable to cure the default. An
event of default under the 2008 Credit Agreement includes customary events of
default and failure to comply with financial covenants, including a maximum
consolidated leverage ratio of 3.5 and a minimum consolidated fixed charge
coverage ratio of 1.2. The unrealized gain (loss) represents the estimated
amount that the Company would receive (pay) to the counterparty in the event of
an early termination.
Forward
Currency-Exchange Contracts
The
Company uses forward currency-exchange contracts primarily to hedge exposures
resulting from fluctuations in currency exchange rates. Such exposures primarily
result from portions of the Company’s operations and assets and liabilities that
are denominated in currencies other than the functional currencies of the
businesses conducting the operations or holding the assets and liabilities. The
Company typically manages its level of exposure to the risk of currency-exchange
fluctuations by hedging a portion of its currency exposures anticipated over the
ensuing 12-month period, using forward currency-exchange contracts that have
maturities of 12 months or less.
Forward currency-exchange contracts that hedge forecasted accounts receivable or
accounts payable are designated as cash flow hedges. The fair values for these
instruments are included in other current assets for unrecognized gains and in
other current liabilities for unrecognized losses, with an offset in accumulated
other comprehensive items (net of tax). For forward currency-exchange contracts
that are designated as fair value hedges, the gain or loss on the derivative, as
well as the offsetting loss or gain on the hedged item are recognized currently
in earnings. The fair values of forward currency-exchange contracts that are not
designated as a hedge are recorded currently in earnings. The Company recognized
a gain of $288,000 in the first quarter of 2009 included in selling, general,
and administrative expenses associated with forward currency-exchange contracts
that were not designated as a hedge.
Notes to
Condensed Consolidated Financial Statements
(Unaudited)
12. Derivatives
(continued)
The
following table summarizes the fair value of the Company’s derivative
instruments designated and not designated as hedging instruments, the notional
values of the associated derivative contracts, and the location of these
instruments in the condensed consolidated balance sheet as of April 4,
2009:
(In
thousands)
|
Balance
Sheet Location
|
|
Asset
(Liability)
|
|
|
Notional
Amount (a)
|
|
|
|
|
|
|
|
|
|
Derivatives
Designated as Hedging Instruments:
|
|
|
|
|
|
|
|
Derivatives
in a Liability Position:
|
|
|
|
|
|
|
|
Interest
rate swap agreements
|
Other
Long-Term Liabilities
|
|
$ |
(1,975 |
) |
|
$ |
23,625 |
|
Forward
currency-exchange contracts
|
Other
Current Liabilities
|
|
$ |
(67 |
) |
|
$ |
3,643 |
|
|
|
Derivatives
Not Designated as Hedging Instruments:
|
|
Derivatives
in an Asset Position:
|
|
Forward
currency-exchange contracts
|
Other
Current Assets
|
|
$ |
290 |
|
|
$ |
13,188 |
|
|
|
|
|
|
|
|
|
|
|
Derivatives
in a Liability Position:
|
|
|
|
|
|
|
|
|
|
Forward
currency-exchange contracts
|
Other
Current Liabilities
|
|
$ |
(2 |
) |
|
$ |
402 |
|
|
|
|
|
|
|
|
|
|
|
(a) The
total notional amount is indicative of the level of the Company’s derivative
activity during the first quarter of 2009.
The
following table summarizes the activity in accumulated other comprehensive items
(OCI) associated with the Company’s derivative instruments designated as cash
flow hedges as of and for the period ended April 4, 2009:
(In
thousands)
|
|
Interest
Rate Swap Agreements
|
|
|
Forward
Currency-Exchange Contracts
|
|
|
Total
|
|
Unrealized
loss (gain), net of tax, at January 3, 2009
|
|
$ |
1,800 |
|
|
$ |
(151 |
) |
|
$ |
1,649 |
|
Gain
Reclassified to Earnings (a)
|
|
|
– |
|
|
|
151 |
|
|
|
151 |
|
(Gain)
Loss Recognized in OCI
|
|
|
(130 |
) |
|
|
44 |
|
|
|
(86 |
) |
Unrealized
loss, net of tax, at April 4, 2009
|
|
$ |
1,670 |
|
|
$ |
44 |
|
|
$ |
1,714 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
Included in revenues in the accompanying condensed consolidated statement
of operations.
|
|
As of
April 4, 2009, $44,000 of the unrealized loss included in OCI related to
interest rate swap agreements and forward currency-exchange contracts is
expected to be reclassified to earnings in 2009.
Notes to
Condensed Consolidated Financial Statements
(Unaudited)
13. Fair
Value Measurements
The
Company adopted SFAS No. 157, “Fair Value Measurements” (SFAS 157), on
December 30, 2007, which did not have a material impact on the Company’s
fair value measurements. SFAS 157 defines fair value as the price that would be
received to sell an asset or paid to transfer a liability in the principal or
most advantageous market for the asset or liability in an orderly transaction
between market participants at the measurement date. SFAS 157 establishes a fair
value hierarchy, which prioritizes the inputs used in measuring fair value into
three broad levels as follows:
|
•
|
Level
1—Quoted prices in active markets for identical assets or
liabilities.
|
|
•
|
Level
2—Inputs, other than the quoted prices in active markets, that are
observable either directly or
indirectly.
|
|
•
|
Level
3—Unobservable inputs based on the Company’s own
assumptions.
|
The
following table presents the fair value hierarchy for those assets and
liabilities measured at fair value on a recurring basis as of April 4,
2009:
|
|
Fair
Value
|
|
(In
thousands)
|
|
Level
1
|
|
|
Level
2
|
|
|
Level
3
|
|
|
Total
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Forward
currency-exchange contracts
|
|
$ |
– |
|
|
$ |
290 |
|
|
$ |
– |
|
|
$ |
290 |
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forward
currency-exchange contracts
|
|
$ |
– |
|
|
$ |
69 |
|
|
$ |
– |
|
|
$ |
69 |
|
Interest rate
swap agreements
|
|
$ |
– |
|
|
$ |
1,975 |
|
|
$ |
– |
|
|
$ |
1,975 |
|
The
Company uses the market approach technique to value its financial assets and
liabilities, and there were no changes in valuation techniques during the first
quarter of 2009. The Company’s financial assets and liabilities carried at fair
value comprise derivative instruments used to hedge the Company’s foreign
currency and interest rate risks. The fair values of the Company’s interest rate
swap agreements are based on LIBOR yield curves at the reporting date. The fair
values of the Company’s forward currency-exchange contracts are based on quoted
forward foreign exchange prices at the reporting date. The forward
currency-exchange contracts and interest rate swap agreements are hedges of
either recorded assets or liabilities or anticipated transactions. Changes in
values of the underlying hedged assets and liabilities or anticipated
transactions are not reflected in the table above.
14. Letters
of Credit
Certain
of the Company’s contracts, particularly for stock-preparation and systems
orders, require the Company to provide a standby letter of credit to a customer
as beneficiary, limited in amount to a negotiated percentage of the total
contract value, in order to guarantee warranty and performance obligations of
the Company under the contract. Typically, these standby letters of credit
expire without being drawn by the beneficiary. In the first quarter of 2009, one
of the Company’s customers indicated its intention to draw upon all
outstanding standby letters of credit issued to the customer as beneficiary to
secure warranty and performance obligations under multiple contracts. The
Company believes the attempted draws by the customer are for reasons unrelated
to the Company’s warranty and performance obligations and the Company has and
intends to continue to vigorously oppose such actions. As of April 4, 2009, the
customer had submitted draws against standby letters of credit totaling $421,000
and the Company has obtained a preliminary injunction against payment to the
customer. In May 2009, the customer submitted additional draws against standby
letters of credit totaling $1,153,000 and the Company has obtained a temporary
restraining order against payment to the customer and is seeking a preliminary
injunction, but there is no assurance that the Company will be able to obtain
such preliminary injunction. The outstanding standby letters of credit to such
customer, including those that have been submitted for draws, total $5,845,000.
These outstanding standby letters of credit have expiration dates ranging from
2009 to 2011.
Notes to
Condensed Consolidated Financial Statements
(Unaudited)
15. Pending
Litigation
The
Company has been named as a co-defendant, together with the Company’s Kadant
Composites LLC subsidiary (Composites LLC) and another defendant, in a consumer
class action lawsuit filed in the United States District Court for the District
of Massachusetts (the Court) on December 27, 2007 on behalf of a putative
class of individuals who own GeoDeck™ decking or railing products manufactured
by Composites LLC between April 2002 and October 2003. The complaint in this
matter purports to assert, among other things, causes of action for unfair and
deceptive trade practices, fraud, negligence, breach of warranty and unjust
enrichment, and it seeks compensatory damages and punitive damages under various
state consumer protection statutes, which plaintiffs claim exceed $50 million.
On March 14, 2008, the Company, Composites LLC, and the other co-defendant
filed motions to dismiss all counts in the complaint. On November 19, 2008,
the Court dismissed the complaint in its entirety, including all claims against
the Company, Composites LLC, and the other co-defendant. On December 4,
2008, the plaintiffs sought to vacate this order of dismissal in order to amend
their complaint, and this motion was denied without prejudice by the Court on
January 12, 2009. On January 27, 2009, the plaintiffs renewed their
motion to vacate the order of dismissal in order to amend their complaint, which
motion was opposed by the Company on February 10, 2009 and denied by the Court
on March 3, 2009. On March 27, 2009, the plaintiffs filed an amended notice
of appeal, clarifying an earlier notice and seeking to challenge the Court’s
dismissal on November 19, 2008 and the Court’s denial on March 3, 2009. On April
16, 2009, the Court formally opened the plaintiffs appeal and on April 23, 2009,
the defendants moved to dismiss as untimely that portion of the plaintiffs
appeal seeking to challenge the November 19, 2008 dismissal. The Court has yet
to schedule a hearing on the plaintiffs’ appeal or defendants' partial motion to
dismiss. The Company intends to defend against this action vigorously, but there
is no assurance the Company will prevail in such defense. The Company could
incur significant costs to defend this lawsuit and a judgment or a settlement of
the claims against the defendants could have a material adverse impact on the
Company’s condensed consolidated financial results. The Company has not made an
accrual related to this litigation as it believes that an adverse outcome is not
probable and estimable at this time.
16. Recent
Accounting Pronouncements
In
December 2007, the Financial Accounting Standards Board (FASB) issued SFAS
No. 141(R) “Business Combinations” (SFAS 141(R)), which replaces SFAS
No. 141. SFAS 141(R) requires the acquiring entity in a business
combination to recognize the assets acquired and the liabilities assumed in the
transaction, establishes the acquisition-date fair value as the measurement
objective for all assets acquired and liabilities assumed, and requires the
acquirer to disclose certain information to enable users to evaluate and
understand the nature and financial effects of the business combination. SFAS
141(R) also requires that cash outflows, such as transaction costs and
post-acquisition restructuring costs, be charged to expense instead of
capitalized as a cost of the acquisition. Contingent purchase price will be
recorded at its initial fair value and then re-measured as time passes through
adjustments to net income. SFAS 141(R) is effective for fiscal years beginning
after December 15, 2008. The Company adopted SFAS 141(R) on January 4, 2009
and the adoption did not have a material affect on its condensed consolidated
financial statements. As of January 3, 2009, the Company had a tax
valuation allowance of $1,012,000 relating to the 2005 Kadant Johnson Inc.
acquisition, a liability for unrecognized tax benefits of $517,000, and accrued
interest and penalties of $843,000, all of which would have affected goodwill if
recognized prior to the end of fiscal 2008, but will now affect the Company’s
annual effective tax rate in the future, if recognized.
In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests
in Consolidated Financial Statements—an Amendment of Accounting Research
Bulletin No. 51” (SFAS 160), which establishes accounting and
reporting standards for ownership interests in subsidiaries held by parties
other than the parent, the amount of consolidated net income attributable to the
parent and to the noncontrolling interest, changes in a parent’s ownership
interest and the valuation of retained non-controlling equity investments when a
subsidiary is deconsolidated. SFAS 160 also establishes reporting requirements
that provide sufficient disclosures that clearly identify and distinguish
between the interests of the parent and the interests of the non-controlling
owners. SFAS 160 is effective for fiscal years beginning after
December 15, 2008. The Company adopted SFAS 160 prospectively, effective
January 4, 2009, except for the presentation and disclosure requirements, which
require retrospective application. Amounts previously reported as minority
interest liability are presented as noncontrolling interest within total
shareholders’ investment and amounts previously reported as minority interest
expense are shown as net income attributable to noncontrolling interest in the
accompanying condensed consolidated financial statements. The adoption did not
have a material affect on the Company’s condensed consolidated financial
statements.
Notes to
Condensed Consolidated Financial Statements
(Unaudited)
16. Recent
Accounting Pronouncements (continued)
In March
2008, the FASB issued SFAS No. 161, “Disclosures about Derivative
Instruments and Hedging Activities” (SFAS 161). SFAS 161 requires
disclosures of how and why an entity uses derivative instruments; how derivative
instruments and related hedged items are accounted for; and how derivative
instruments and related hedged items affect an entity’s financial position,
financial performance and cash flows. SFAS 161 is effective for fiscal years
beginning after November 15, 2008. The Company adopted SFAS 161 in the
first quarter of 2009 and as a result it has included enhanced disclosures for
derivative instruments and hedging activities in the accompanying condensed
consolidated financial statements.
In April
2008, the FASB issued FASB Staff Position (FSP) FAS 142-3, “Determination of the
Useful Life of Intangible Assets” (FSP FAS 142-3). FSP FAS 142-3 amends the
factors that should be considered in developing the renewal or extension
assumptions used to determine the useful life of a recognized intangible asset
under SFAS No. 142, “Goodwill and Other Intangible Assets.” FSP FAS 142-3 also
requires expanded disclosure related to the determination of intangible asset
useful lives. FSP FAS 142-3 is effective for fiscal years beginning after
December 15, 2008. The Company adopted FSP FAS 142-3 on January 4, 2009,
which had no affect on its condensed consolidated financial
statements.
In
December 2008, the FASB issued FSP No. 132(R)-1, “Employers’ Disclosures
about Postretirement Benefit Plan Assets” (FSP 132(R)-1). FSP 132(R)-1 requires
additional disclosures about an employer’s plan assets of defined benefit
pension or other postretirement plans. This rule expands current disclosures of
defined benefit pension and postretirement plan assets to include information
regarding the fair value measurements of plan assets similar to the Company’s
current SFAS 157 disclosures. FSP 132(R)-1 is effective for fiscal
years ending after December 15, 2009. The Company is currently evaluating
the potential impact of the adoption of FSP 132(R)-1 on its financial statement
disclosures.
In April
2009, the FASB issued FSP No. FAS 115-2 and FAS 124-2 (FSP 115-2 and 124-2),
“Recognition and Presentation of Other-Than-Temporary Impairments.” This FSP
amends the other-than-temporary impairment guidance for certain debt securities
and will require the investor to assess the likelihood of selling the debt
security prior to recovery of its cost basis. If an investor is able to meet the
criteria to assert that it does not intend to sell the debt security and more
likely than not will not be required to sell the debt security before its
anticipated recovery, impairment charges related to credit losses would be
recognized in earnings whereas impairment charges related to non-credit losses
would be reflected in other comprehensive income. FSP 115-2 and 124-2 is
effective for interim and annual reporting periods ending after June 15, 2009.
The Company does not expect the changes associated with the adoption of FSP
115-2 and 124-2 to have a material effect on the Company's condensed
consolidated financial statements.
In April
2009, the FASB issued FSP No. FAS 107-1 and APB 28-1 (FSP FAS 107-1 and APB
28-1), “Interim Disclosures about Fair Value of Financial Instruments.” This FSP
requires the fair value disclosures required by SFAS No. 107, “Disclosures about
Fair Value of Financial Instruments,” regarding the fair value of financial
instruments to be included in interim financial statements. FSP FAS 107-1 and
APB 28-1 is effective for interim periods ending after June 15, 2009 and
requires additional disclosure from that currently required.
In April
2009, the FASB issued FSP No. 157-4 (FSP 157-4), "Determining Fair Value When
the Volume and Level of Activity for the Asset or Liability Have Significantly
Decreased and Identifying Transactions That Are Not Orderly." FSP 157-4 provides
additional guidance for estimating fair value in accordance with SFAS 157 when
the volume and level of activity for the asset or liability have significantly
decreased. FSP 157-4 also includes guidance on identifying circumstances that
indicate a transaction is not orderly. FSP 157-4 is effective for interim and
annual reporting periods ending after June 15, 2009. The Company does not expect
the changes associated with the adoption of FSP 157-4 to have a material effect
on the Company's condensed consolidated financial statements.
Notes to
Condensed Consolidated Financial Statements
(Unaudited)
17. Discontinued
Operation
In 2005,
Composites LLC sold substantially all of its assets to LDI Composites Co.
(Buyer). Under the terms of the asset purchase agreement, Composites LLC
retained certain liabilities associated with the operation of the business prior
to the sale, including the warranty obligations associated with products
manufactured prior to the sale date. Composites LLC retained all of the cash
proceeds received from the asset sale and continued to administer and pay
warranty claims from the sale proceeds into the third quarter of 2007. On
September 30, 2007, Composites LLC announced that it no longer had
sufficient funds to honor warranty claims, was unable to pay or process warranty
claims, and ceased doing business. All activity related to this business is
classified in the results of the discontinued operation in the accompanying
condensed consolidated financial statements.
Through
the sale date of October 21, 2005, Composites LLC offered a standard
limited warranty to the owner of its decking and roofing products, limited to
repair or replacement of the defective product or a refund of the original
purchase price. Composites LLC records the minimum amount of the potential range
of loss for products under warranty in accordance with SFAS No. 5,
“Accounting for Contingencies” (SFAS 5). As of April 4, 2009, the accrued
warranty costs associated with the composites business were $2,142,000, which
represents the low end of the estimated range of warranty reserve required based
on the level of claims received. Composites LLC has calculated that the total
potential warranty cost ranges from $2,142,000 to approximately $13,100,000. The
high end of the range represents the estimated maximum level of warranty claims
remaining based on the total sales of the products under warranty. Composites
LLC will continue to record adjustments to the accrued warranty costs to reflect
the minimum amount of the potential range of loss for products under warranty
based on judgments entered against it in litigation, if any.
See Note
15 for information related to pending litigation associated with the composites
business.
Item 2 – Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
This Quarterly Report on Form 10-Q
includes forward-looking statements that are not statements of historical fact,
and may include statements regarding possible or assumed future results of
operations. Forward-looking statements are subject to risks and uncertainties
and are based on the beliefs and assumptions of our management, using
information currently available to our management. When we use words such as
“believes,” “expects,” “anticipates,” “intends,” “plans,”
“estimates,” “should,” “likely,” “will,” “would,” or similar expressions, we are
making forward-looking statements.
Forward-looking statements are not
guarantees of performance. They involve risks, uncertainties, and assumptions.
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. We
undertake no obligation to publicly update any forward-looking statement,
whether as a result of new information, future events, or otherwise. 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 Part II, Item 1A, of this
Report.
Overview
Company
Background
We are a leading supplier of equipment used in the global papermaking and paper
recycling industries and are also a manufacturer of granules made from
papermaking byproducts. Our continuing operations are comprised of one
reportable operating segment: Pulp and Papermaking Systems (Papermaking
Systems), and a separate product line, Fiber-based Products, reported in Other
Business. Through our Papermaking Systems segment, we develop, manufacture, and
market a range of equipment and products for the global papermaking and paper
recycling industries. We have a large customer base that includes most of the
world’s major paper manufacturers. We believe our large installed base provides
us with a spare parts and consumables business that yields higher margins than
our capital equipment business, and which should be less susceptible to the
cyclical trends in the paper industry.
Through
our Fiber-based Products line, we manufacture and sell granules derived from
pulp fiber for use as carriers for agricultural, home lawn and garden, and
professional lawn, turf and ornamental applications, as well as for oil and
grease absorption.
In
addition, prior to its sale in 2005, our Kadant Composites LLC subsidiary
(Composites LLC) operated a composite building products business, which is
presented as a discontinued operation in the accompanying condensed consolidated
financial statements.
We were
incorporated in Delaware in November 1991. On July 12, 2001, we changed our name
to Kadant Inc. from Thermo Fibertek Inc. Our common stock is listed on the New
York Stock Exchange, where it trades under the symbol “KAI.”
Papermaking
Systems Segment
Our Papermaking
Systems segment designs and manufactures stock-preparation systems and
equipment, fluid-handling systems and equipment, paper machine accessory
equipment, and water-management systems primarily for the paper and paper
recycling industries. Our principal products include:
|
-
|
Stock-preparation systems and
equipment: custom-engineered systems and equipment, as well as
standard individual components, for pulping, de-inking, screening,
cleaning, and refining recycled and virgin fibers for preparation for
entry into the paper machine during the production of recycled
paper;
|
|
-
|
Fluid handling systems and
equipment: rotary joints, precision unions, steam and condensate
systems, components, and controls used primarily in the dryer section of
the papermaking process and during the production of corrugated boxboard,
metals, plastics, rubber, textiles and
food;
|
|
-
|
Paper machine accessory
equipment: doctoring systems and related consumables that
continuously clean papermaking rolls to keep paper machines running
efficiently; doctor blades made of a variety of materials to perform
functions
|
Overview
(continued)
|
including
cleaning, creping, web removal, and application of coatings; and profiling
systems that control moisture, web curl, and gloss during paper
production; and
|
|
-
|
Water-management systems:
systems and equipment used to continuously clean paper machine
fabrics, drain water from pulp mixtures, form the sheet or web, and
filter the process water for
reuse.
|
Other
Business
Our other business includes our Fiber-based Products business that produces
biodegradable, absorbent granules from papermaking byproducts for use primarily
as carriers for agricultural, home lawn and garden, and professional lawn, turf
and ornamental applications, as well as for oil and grease
absorption.
Discontinued
Operation
In 2005,
Composites LLC sold substantially all of its assets to LDI Composites Co. Under
the terms of the asset purchase agreement, Composites LLC retained certain
liabilities associated with the operation of the business prior to the sale,
including the warranty obligations associated with products manufactured prior
to the sale date. Composites LLC retained all of the cash proceeds received from
the asset sale and continued to administer and pay warranty claims from the sale
proceeds into the third quarter of 2007. On September 30, 2007, Composites
LLC announced that it no longer had sufficient funds to honor warranty claims,
was unable to pay or process warranty claims, and ceased doing
business.
Through
the sale date of October 21, 2005, Composites LLC offered a standard
limited warranty to the owners of its decking and roofing products, limited to
repair or replacement of the defective product or a refund of the original
purchase price. As of April 4, 2009, the accrued warranty costs associated with
the composites business were $2.1 million, which represents the low end of the
estimated range of warranty reserve required based on the level of claims
received. Composites LLC has calculated that the total potential warranty cost
ranges from $2.1 million to approximately $13.1 million. The high end of the
range represents the estimated maximum level of warranty claims remaining based
on the total sales of the products under warranty. Composites LLC will continue
to record adjustments to accrued warranty costs to reflect the minimum amount of
the potential range of loss for products under warranty based on judgments known
to be entered against it in litigation, if any.
All
activity related to this business is classified in the results of the
discontinued operation in the accompanying condensed consolidated financial
statements.
Composites
LLC’s inability to pay or process warranty claims has exposed us to greater
risks associated with litigation. For more information regarding our current
litigation arising from these claims, see Part II, Item 1, “Legal Proceedings,”
and Part II, Item 1A, “Risk Factors”.
International
Sales
During
the first quarters of 2009 and 2008, approximately 63% and 59%, respectively, of
our sales were to customers outside the United States, principally in Asia and
Europe. We generally seek to charge our customers in the same currency in which
our operating costs are incurred. However, our financial performance and
competitive position can be affected by currency exchange rate fluctuations
affecting the relationship between the U.S. dollar and foreign currencies. We
seek to reduce our exposure to currency fluctuations through the use of forward
currency exchange contracts. We may enter into forward contracts to hedge
certain firm purchase and sale commitments denominated in currencies other than
our subsidiaries’ functional currencies. These contracts hedge transactions
principally denominated in U.S. dollars.
Overview
(continued)
Application
of Critical Accounting Policies and Estimates
The discussion and analysis of our financial condition and results of operations
are based upon our condensed consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States. The preparation of these condensed consolidated 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 condensed consolidated financial statements, and the reported
amounts of revenues and expenses during the reporting period. Actual results may
differ from these estimates under different assumptions or
conditions.
Critical accounting policies are
defined as those that reflect significant judgments and uncertainties, and could
potentially result in materially different results under different assumptions
and conditions. We believe that our most critical accounting policies, upon
which our financial condition depends and which involve the most complex or
subjective decisions or assessments, are those described in “Management’s
Discussion and Analysis of Financial Condition and Results of Operations” under
the section captioned “Application of Critical Accounting Policies and
Estimates” in Part I, Item 7, of our Annual Report on Form 10-K for the fiscal
year ended January 3, 2009, filed with the Securities and Exchange Commission
(SEC). There have been no material changes to these critical accounting policies
since fiscal year-end 2008 that warrant disclosure.
Industry
and Business Outlook
Our
products are primarily sold to the global pulp and paper industry. The worldwide
economic downturn, which accelerated in the fourth quarter of 2008, continues to
negatively impact paper producers. In response to the economic slowdown, paper
producers have taken numerous steps to control operating costs including closing
factories, increasing downtime at paper mills, deferring maintenance and
upgrades, and delaying or canceling projects. Revenues in all of our product
lines within our papermaking systems segment in the first quarter of 2009 were
negatively impacted and we experienced a $20.9 million, or 24%, decrease in
revenues in the first quarter of 2009 compared to the first quarter of 2008. A
significant factor contributing to this decrease was the slowdown in China,
where the linerboard market is experiencing overcapacity. Our revenues from
China are primarily derived from large capital orders, the timing of which is
often difficult to predict. The recent downturn has caused many paper producers
in China to significantly delay or even cancel projects. These delays, as well
as delays in receiving down payments, could cause us to recognize revenue on
these projects in periods later than originally anticipated. We expect our
revenues in 2009 will continue to be negatively impacted by the current economic
environment.
In
response to this difficult environment, we have taken a number of steps to
optimize our business structure and maximize internal efficiencies, which
include integrating multiple operations in a region, merging our sales teams in
certain markets, and reducing the number of employees in certain locations,
including China and North America. In addition, we continue to concentrate our
efforts on several initiatives intended to improve our operating results,
including: increasing aftermarket sales, delivering products and technical
solutions that provide our customers with a good return on their investments
through energy-savings and fiber-yield improvements, penetrating existing
markets where we see opportunity, and increasing our use of low-cost
manufacturing bases. We also continue to focus our efforts on managing our
operating costs, capital expenditures, and working capital.
For 2009,
we expect GAAP (generally accepted accounting principles) revenues and earnings
per share from continuing operations, which exclude the results from our
discontinued operation, as follows: For the second quarter of 2009, we expect to
report a loss from continuing operations between $.24 and $.26 per diluted
share, on revenues of $50 to $52 million. This includes $.08 of incremental tax
provision principally due to not being able to benefit the expected U.S. losses
and $.06 of estimated restructuring costs. For 2009, we expect to report a loss
from continuing operations between $.55 and $.65 per diluted share, on revenues
of $220 to $230 million, revised from our previous guidance of diluted earnings
per share of $.43 to $.53, on revenues of $260 to $270 million. The full year
guidance includes $.39 of incremental tax provision and $.14 of estimated
restructuring costs. The incremental tax provision is due to applying a
valuation allowance to certain deferred tax assets and our inability to record a
tax benefit on pre-tax losses in the U.S. as a result of our cumulative loss
position in the U.S. caused by the large goodwill impairment charge recorded in
the fourth quarter of 2008.
Results
of Operations
First Quarter
2009 Compared With First Quarter
2008
The following table sets forth our unaudited condensed consolidated statement of
operations expressed as a percentage of total revenues from continuing
operations for the first fiscal quarters of 2009 and 2008. The results of
operations for the fiscal quarter ended April 4, 2009 are not necessarily
indicative of the results to be expected for the full fiscal year.
|
|
Three
Months Ended
|
|
|
|
April 4,
|
|
|
March 29,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
100 |
% |
|
|
100 |
% |
|
|
|
|
|
|
|
|
|
Costs
and Operating Expenses:
|
|
|
|
|
|
|
|
|
Cost of
revenues
|
|
|
62 |
|
|
|
60 |
|
Selling, general, and
administrative expenses
|
|
|
34 |
|
|
|
30 |
|
Research and development
expenses
|
|
|
2 |
|
|
|
2 |
|
Restructuring costs and other
income, net
|
|
|
1 |
|
|
|
(1 |
) |
|
|
|
99 |
|
|
|
91 |
|
|
|
|
|
|
|
|
|
|
Operating
Income
|
|
|
1 |
|
|
|
9 |
|
|
|
|
|
|
|
|
|
|
Interest
Income
|
|
|
– |
|
|
|
1 |
|
Interest
Expense
|
|
|
(1 |
) |
|
|
(1 |
) |
|
|
|
|
|
|
|
|
|
(Loss)
Income from Continuing Operations Before Provision for Income
Taxes
|
|
|
– |
|
|
|
9 |
|
Provision
for Income Taxes
|
|
|
(4 |
) |
|
|
(3 |
) |
|
|
|
|
|
|
|
|
|
(Loss)
Income from Continuing Operations
|
|
|
(4 |
) |
|
|
6 |
|
|
|
|
|
|
|
|
|
|
Net
(Loss) Income Attributable to Kadant
|
|
|
(4 |
)% |
|
|
6 |
% |
Revenues
Revenues
decreased $20.9 million, or 24%, to $65.0 million in the first quarter of 2009
from $85.9 million in the first quarter of 2008, including a $7.0 million, or
8%, decrease from the unfavorable effects of currency translation. Excluding the
effects of currency translation, revenues decreased $13.9 million, or 16%, in
the first quarter of 2009 due to a decrease in revenues in all of our major
product lines as our customers continued to take steps to control operating
costs including increasing downtime at paper mills and delaying or canceling
projects. Excluding the effects of currency translation, the largest revenue
declines in the first quarter of 2009 were in our fluid-handling product line,
which decreased $5.0 million, or 22%, and our stock-preparation equipment
product line in China and North America, which decreased $16.8 million, or 67%.
Partially offsetting these decreases in revenues in the first quarter of 2009
was an increase of $12.6 million, or 114%, in stock-preparation equipment sales
in Europe primarily due to a large capital equipment project in
Vietnam.
Results
of Operations (continued)
Revenues for the first quarters of 2009 and 2008 from our Papermaking Systems
segment and our other business are as follows:
|
|
Three
Months Ended
|
|
|
|
April
4,
|
|
|
March
29,
|
|
(In
thousands)
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
Papermaking
Systems
|
|
$ |
61,987 |
|
|
$ |
83,258 |
|
Other Business
|
|
|
2,970 |
|
|
|
2,606 |
|
|
|
$ |
64,957 |
|
|
$ |
85,864 |
|
Papermaking Systems Segment.
Revenues in the Papermaking Systems segment decreased $21.3 million, or
26%, to $62.0 million in the first quarter of 2009 from $83.3 million in the
first quarter of 2008, including a $7.0 million, or 9%, decrease from the
unfavorable effects of currency translation. Excluding the effects of currency
translation, revenues in the Papermaking Systems segment decreased $14.3
million, or 17%, due to a decrease in revenues in all of the segment's product
lines as our customers significantly reduced their order volumes in the current
economic environment. Excluding the effects of currency translation, the largest
revenue declines in the first quarter of 2009 were in our fluid-handling product
line, which decreased $5.0 million, or 22%, and our stock-preparation equipment
product line, which decreased $4.2 million, or 12%. We expect to continue to see
declines in revenues compared to the prior year periods in all of the segment's
product lines until late in 2009 due to the significant decrease in order
volumes.
Other Business. Revenues from the
Fiber-based Products business increased $0.4 million, or 14%, to $3.0 million in
the first quarter of 2009 from $2.6 million in the first quarter of
2008 primarily due to stronger sales of Biodac™, our
line of biodegradable granular products.
The
following table presents revenues at the Papermaking Systems segment by product
line, the changes in revenues by product line between the first quarters of 2009
and 2008, and the changes in revenues by product line between the first quarters
of 2009 and 2008 excluding the effect of currency translation. The presentation
of the changes in revenues by product line excluding the effect of currency
translation is a non-GAAP (generally accepted accounting principles) measure. We
believe this non-GAAP measure helps investors gain a better understanding of our
underlying operations, consistent with how our management measures and forecasts
our performance, especially when comparing such results to prior periods. This
non-GAAP measure should not be considered superior to or a substitute for the
corresponding GAAP measure.
|
|
Three
Months Ended
|
|
|
Decrease
Excluding
Effect
of
|
|
(In
millions)
|
|
April
4,
2009
|
|
|
March
29,
2008
|
|
|
Decrease
|
|
|
Currency
Translation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product
Line:
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-Preparation
Equipment
|
|
$ |
29.2 |
|
|
$ |
36.3 |
|
|
$ |
(7.1 |
) |
|
$ |
(4.2 |
) |
Fluid-Handling
|
|
|
15.7 |
|
|
|
22.5 |
|
|
|
(6.8 |
) |
|
|
(5.0 |
) |
Accessories
|
|
|
11.6 |
|
|
|
15.9 |
|
|
|
(4.3 |
) |
|
|
(2.6 |
) |
Water-Management
|
|
|
5.1 |
|
|
|
8.0 |
|
|
|
(2.9 |
) |
|
|
(2.4 |
) |
Other
|
|
|
0.4 |
|
|
|
0.6 |
|
|
|
(0.2 |
) |
|
|
(0.1 |
) |
|
|
$ |
62.0 |
|
|
$ |
83.3 |
|
|
$ |
(21.3 |
) |
|
$ |
(14.3 |
) |
Revenues
from the segment’s stock-preparation equipment product line decreased $7.1
million, or 20%, in the first quarter of 2009 compared to the first quarter of
2008, including a $2.9 million, or 8%, decrease from the unfavorable effect of
currency translation. Excluding the effect of currency translation, revenues
from the segment’s stock preparation equipment product line decreased
$4.2 million, or 12%, primarily due to an $11.1 million, or 91%, decrease
in our stock-preparation equipment sales in
Results
of Operations (continued)
China and
a $5.7 million, or 44%, decrease in stock-preparation equipment sales in North
America. These significant decreases were due to a reduction in orders as major
manufacturers cancelled or postponed projects due to the current economic environment. Partially
offsetting the decreases in revenues in the first quarter of 2009 was an
increase of $12.6 million, or 114%, in stock-preparation sales in Europe
primarily due to a large capital equipment project in Vietnam. We expect to
continue to see declines in stock-preparation equipment sales, especially in
China, North America and Europe, for the foreseeable future given the current
economic environment and its impact on paper producers.
Revenues
from the segment’s fluid-handling product line decreased $6.8 million, or 30%,
in the first quarter of 2009 compared to the first quarter of 2008, including a
$1.8 million, or 8%, decrease from the unfavorable effect of currency
translation. Excluding the effect of currency translation, revenues from the
segment’s fluid-handling product line decreased $5.0 million, or 22%, primarily
due to a decrease in revenues in Europe, China, and the U.S. due to
significantly lower demand in the current economic environment.
Revenues
from the segment’s accessories product line decreased $4.3 million, or 27%, in
the first quarter of 2009 compared to the first quarter of 2008, including a
$1.7 million, or 10%, decrease from the unfavorable effect of currency
translation. Excluding the effect of currency translation, revenues from the
segment’s accessories product line decreased $2.6 million, or 17%, primarily due
to decreased demand in North America as customers curtailed production and
reduced their order volumes.
Revenues
from the segment’s water-management product line decreased $2.9 million, or 36%,
in the first quarter of 2009 compared to the first quarter of 2008, including a
$0.5 million, or 6%, decrease from the unfavorable effect of currency
translation. Excluding the effect of currency translation, revenues from the
segment’s water management product line decreased $2.4 million, or 30%,
primarily due to a decrease in capital sales in Europe and North
America.
Gross
Profit Margin
Gross profit margins for the first
quarters of 2009 and 2008 are as follows:
|
|
Three
Months Ended
|
|
|
|
April
4,
|
|
|
March
29,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
Gross
Profit Margin:
|
|
|
|
|
|
|
Papermaking
Systems
|
|
|
38 |
% |
|
|
40 |
% |
Other
|
|
|
34 |
|
|
|
39 |
|
|
|
|
38 |
% |
|
|
40 |
% |
Gross profit margin decreased
to 38% in the first quarter of 2009 from 40% in the first quarter of
2008.
Papermaking Systems Segment. The gross profit
margin in the Papermaking Systems segment decreased to 38% in the first
quarter of 2009 from 40% in the first quarter of 2008. This decrease was
primarily due to lower margins in our water-management product line due to the
underabsorption of overhead costs given reduced order volumes. We are in the
process of consolidating our water-management manufacturing facility into our
facilities in Massachusetts and Mexico and we expect to continue to see reduced
margins in this product line until this consolidation is completed in the fourth
quarter of 2009. The gross profit margin also decreased due to an unfavorable
product mix as higher-margin fluid-handling revenues accounted for a smaller
portion of our revenues in 2009.
Other Business. The gross profit margin
in our Fiber-based Products business decreased to 34% in the first quarter
of 2009 from 39% in the first quarter of 2008.
Operating
Expenses
Selling, general, and administrative expenses as a percentage of revenues
increased to 34% in the first quarter of 2009 from 30% in the first quarter of
2008. Selling, general, and administrative expenses decreased $3.2 million, or
12%, to $22.2 million in the first quarter of 2009 from $25.4 million in the
first quarter of 2008. This decrease includes a $1.7 million decrease from
the
Results
of Operations (continued)
favorable
effect of foreign currency translation and a $1.6 million decrease in selling
expenses due, in part, to our recent restructuring efforts that reduced the
number of employees and merged our sales force in certain markets. These
decreases in 2009 were offset, in part, by an increase of $0.4 million in bad
debt expense associated with a customer bankruptcy and an increase of $0.5
million in legal expenses primarily associated with a customer
dispute.
Total
stock-based compensation expense was $0.7 million in both the first quarters of
2009 and 2008, and is included in selling, general, and administrative expenses
in the accompanying condensed consolidated statement of operations. As of April
4, 2009, unrecognized compensation cost related to restricted stock units was
approximately $3.8 million, which will be recognized over a weighted average
period of 1.8 years.
Research and development expenses
decreased $0.1 million to $1.5 million in the first quarter of 2009 compared to
$1.6 million in the first quarter of 2008 and represented 2% of revenues in both
periods.
Restructuring Costs and Other Income,
Net
We recorded net restructuring costs and
other income of $0.8 million and ($0.5) million in the first quarters of 2009
and 2008, respectively. The restructuring costs in the first quarter of 2009
consisted of severance and associated charges of $0.8 million primarily related
to the reduction of 43 full-time positions in China, the U.S., and France. The
restructuring costs in the first quarter of 2008 consisted of severance charges
of $0.1 million related to our 2008 restructuring plan. Other income of $0.6
million in the first quarter of 2008 consisted of a pre-tax gain of
$0.6 million resulting from the sale of land for $0.7 million in cash. All
of these items occurred in the Papermaking Systems segment. We estimate
annualized savings of $1.0 million in cost of revenues and $0.7 million in
selling, general, and administrative expenses from the 2009 restructuring
actions. We expect to incur an additional $1.8 million in restructuring costs
during the remainder of 2009.
Interest
Income
Interest income decreased $0.3 million,
or 62%, to $0.2 million in the first quarter of 2009 from $0.5 million in
the first quarter of 2008 due to lower average interest rates and, to a lesser
extent, lower average invested balances in the 2009 period.
Interest
Expense
Interest expense increased $0.2
million, or 37%, to $0.8 million in the first quarter of 2009 from
$0.6 million in the first quarter of 2008 primarily due to higher average
outstanding borrowings during the first quarter of 2009 compared to the first
quarter of 2008.
Provision
for Income Taxes
Our provision for income taxes in the
first quarter of 2009 included a $1.1 million tax provision associated with
earnings from our foreign operations and a $1.2 million tax provision associated
with applying a valuation allowance to certain deferred tax assets. Our
provision for income taxes in the firrst quarter of 2009 does not include a tax
benefit of $1.4 million, as we were not able to record a tax benefit on our U.S.
pre-tax losses due to our accumulated loss position in the U.S. tax jurisdiction
and the uncertainty of profitability in future periods.
(Loss)
Income from Continuing Operations
Loss from continuing operations was
$2.9 million in the first quarter of 2009 compared to income from
continuing operations of $5.2 million in the first quarter of 2008. The decrease
in the 2009 period was primarily due to a decrease in operating income of $7.3
million (see Revenues
and Gross Profit Margin discussed
above).
Loss
from Discontinued Operation
Loss from
the discontinued operation was $4 thousand in both the first quarters of 2009
and 2008.
As of
April 4, 2009, the accrued warranty costs associated with the composites
business were $2.1 million, which represents the low end of the estimated range
of warranty reserve required based on the level of claims received. Composites
LLC has calculated that the total potential warranty cost ranges from $2.1
million to approximately $13.1 million. The high end of the range represents the
estimated maximum level of warranty claims remaining based on the total sales of
the products under warranty.
Results
of Operations (continued)
Composites LLC retained all of the cash proceeds received from the asset sale in
October 2005 and continued to administer and pay warranty claims from the sale
proceeds into the third quarter of 2007. On September 30, 2007, Composites
LLC announced that it no longer had sufficient funds to honor warranty claims,
was unable to pay or process warranty claims, and ceased doing business.
Composites LLC will continue to record adjustments to accrued warranty costs to
reflect the minimum amount of the potential range of loss for products under
warranty based on judgments entered against it in litigation. Our consolidated
results in future reporting periods will be negatively impacted if the future
level of warranty claims exceeds the warranty reserve.
Recent
Accounting Pronouncements
In
December 2007, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No. 141(R), “Business
Combinations” (SFAS 141(R)), which replaces SFAS No. 141. SFAS 141(R)
requires the acquiring entity in a business combination to recognize the assets
acquired and the liabilities assumed in the transaction, establishes the
acquisition-date fair value as the measurement objective for all assets acquired
and liabilities assumed, and requires the acquirer to disclose certain
information to enable users to evaluate and understand the nature and financial
effects of the business combination. SFAS 141(R) also requires that cash
outflows, such as transaction costs and post-acquisition restructuring costs, be
charged to expense instead of capitalized as a cost of the acquisition.
Contingent purchase price will be recorded at its initial fair value and then
re-measured as time passes through adjustments to net income. SFAS 141(R) is
effective for fiscal years beginning after December 15, 2008. We adopted
SFAS 141(R) on January 4, 2009 and the adoption did not have a material affect
on our condensed consolidated financial statements. As of January 3, 2009,
we had a tax valuation allowance of $1,012,000 relating to the 2005 Kadant
Johnson Inc. acquisition, a liability for unrecognized tax benefits of $517,000,
and accrued interest and penalties of $843,000, all of which would have affected
goodwill if recognized prior to the end of fiscal 2008, but will now affect our
annual effective tax rate in the future, if recognized.
In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests
in Consolidated Financial Statements—an Amendment of Accounting Research
Bulletin No. 51” (SFAS 160), which establishes accounting and
reporting standards for ownership interests in subsidiaries held by parties
other than the parent, the amount of consolidated net income attributable to the
parent and to the noncontrolling interest, changes in a parent’s ownership
interest and the valuation of retained non-controlling equity investments when a
subsidiary is deconsolidated. SFAS 160 also establishes reporting requirements
that provide sufficient disclosures that clearly identify and distinguish
between the interests of the parent and the interests of the non-controlling
owners. SFAS 160 is effective for fiscal years beginning after
December 15, 2008. We adopted SFAS 160 prospectively, effective January 4,
2009, except for the presentation and disclosure requirements, which require
retrospective application. Amounts previously reported as minority interest
liability are presented as noncontrolling interest within total shareholders’
investment and amounts previously reported as minority interest expense are
shown as net income attributable to noncontrolling interest in the accompanying
condensed consolidated financial statements. The adoption did not have a
material affect on our condensed consolidated financial statements.
In March
2008, the FASB issued SFAS No. 161, “Disclosures about Derivative
Instruments and Hedging Activities” (SFAS 161). SFAS 161 requires
disclosures of how and why an entity uses derivative instruments; how derivative
instruments and related hedged items are accounted for; and how derivative
instruments and related hedged items affect an entity’s financial position,
financial performance and cash flows. SFAS 161 is effective for fiscal years
beginning after November 15, 2008. We adopted SFAS 161 in the first quarter
of 2009 and as a result have included enhanced disclosures for derivative
instruments and hedging activities in the accompanying condensed consolidated
financial statements.
In April
2008, the FASB issued FASB Staff Position (FSP) FAS 142-3, “Determination of the
Useful Life of Intangible Assets” (FSP FAS 142-3). FSP FAS 142-3 amends the
factors that should be considered in developing the renewal or extension
assumptions used to determine the useful life of a recognized intangible asset
under SFAS No. 142, “Goodwill and Other Intangible Assets.” FSP FAS 142-3 also
requires expanded disclosure related to the determination of intangible asset
useful lives. FSP FAS 142-3 is effective for fiscal years beginning after
December 15, 2008. We adopted FSP FAS 142-3 on January 4, 2009, which had
no affect on our condensed consolidated financial statements.
In
December 2008, the FASB issued FSP No. 132(R)-1, “Employers’ Disclosures
about Postretirement Benefit Plan Assets” (FSP 132(R)-1). FSP 132(R)-1 requires
additional disclosures about an employer’s plan assets of defined benefit
pension or other postretirement plans. This rule expands current disclosures of
defined benefit pension and postretirement plan assets to include information
regarding the fair value measurements of plan assets similar to our current SFAS
No. 157, “Fair Value
Results
of Operations (continued)
Measurements,”
disclosures. FSP 132(R)-1 is effective for fiscal years ending after
December 15, 2009. We are currently evaluating the potential impact of the
adoption of FSP 132(R)-1 on our financial statement disclosures.
In April
2009, the FASB issued FSP No. FAS 115-2 and FAS 124-2 (FSP 115-2 and 124-2),
“Recognition and Presentation of Other-Than-Temporary Impairments.” This FSP
amends the other-than-temporary impairment guidance for certain debt securities
and will require the investor to assess the likelihood of selling the debt
security prior to recovery of its cost basis. If an investor is able to meet the
criteria to assert that it does not intend to sell the debt security and more
likely than not will not be required to sell the debt security before its
anticipated recovery, impairment charges related to credit losses would be
recognized in earnings whereas impairment charges related to non-credit losses
would be reflected in other comprehensive income. FSP 115-2 and 124-2 is
effective for interim and annual reporting periods ending after June 15, 2009.
We do not expect the changes associated with the adoption of FSP 115-2 and 124-2
to have a material effect on our condensed consolidated financial
statements.
In April
2009, the FASB issued FSP No. FAS 107-1 and APB 28-1 (FSP FAS 107-1 and APB
28-1), “Interim Disclosures about Fair Value of Financial Instruments.” This FSP
requires the fair value disclosures required by SFAS No. 107, “Disclosures about
Fair Value of Financial Instruments” regarding the fair value of financial
instruments to be included in interim financial statements. FSP FAS 107-1 and
APB 28-1 is effective for interim periods ending after June 15, 2009 and
requires additional disclosure from that currently required.
In April
2009, the FASB issued FSP No. 157-4 (FSP 157-4), "Determining Fair Value When
the Volume and Level of Activity for the Asset or Liability Have Significantly
Decreased and Identifying Transactions That Are Not Orderly." FSP 157-4 provides
additional guidance for estimating fair value in accordance with SFAS 157 when
the volume and level of activity for the asset or liability have significantly
decreased. FSP 157-4 also includes guidance on identifying circumstances that
indicate a transaction is not orderly. FSP 157-4 is effective for interim and
annual reporting periods ending after June 15, 2009. We do not expect the
changes associated with the adoption of FSP 157-4 to have a material effect on
our condensed consolidated financial statements.
Liquidity
and Capital Resources
Consolidated working capital, including
the discontinued operation, was $90.0 million at April 4, 2009, compared with
$98.0 million at January 3, 2009. Included in working capital are cash and cash
equivalents of $46.9 million at April 4, 2009, compared with $40.1 million at
January 3, 2009. At April 4, 2009, $39.5 million of cash and cash equivalents
were held by our foreign subsidiaries.
First
Quarter 2009
Our operating activities provided cash of $13.8 million in the first quarter of
2009 primarily related to our continuing operations. The cash provided by our
continuing operations in the first quarter of 2009 primarily resulted from a
decrease in accounts receivable of $17.3 million and a decrease in inventories
of $9.0 million. These sources of cash in 2009 were offset in part by uses of
cash from a decrease in accounts payable of $6.5 million and a decrease in other
current liabilities of $6.1 million. The decreases in accounts
receivable and accounts payable were primarily associated with our
stock-preparation equipment product line in North America. In addition, the
shipment of a large order in our stock-preparation equipment product line to
Vietnam contributed to decreases in customer deposits and
inventory.
Our
investing activities used cash of $1.1 million in the first quarter of 2009
related entirely to our continuing operations. We used cash of $1.2 million in
the first quarter of 2009 to purchase property, plant, and
equipment.
Our financing activities
used cash of $4.6 million in the first quarter of 2009 related entirely to our
continuing operations. We used cash of $18.2 million in the first quarter of
2009 to pay off our outstanding short- and long-term obligations and we
used cash of $3.3 million to repurchase our common stock on the open market. We
received $17.0 million of proceeds from the issuance of long-term
obligations.
First
Quarter 2008
Our operating activities provided cash of $6.3 million in the first quarter of
2008 related primarily to our continuing operations. The cash
provided by our continuing operations in the first quarter of 2008 was primarily
due to income from
Liquidity
and Capital Resources (continued)
continuing
operations of $5.2 million, a decrease in accounts receivable of $8.3 million,
and a non-cash charge of $1.9 million for depreciation and amortization expense.
These sources of cash in the first quarter of 2008 were offset in part by a
decrease in other current liabilities of $5.6 million and an increase in
inventories of $4.5 million. The decrease in other current liabilities of $5.6
million
was primarily due to a decrease of $4.1 million in accrued payroll and employee
benefits primarily related to incentive payments made in the first quarter of
2008.
Our
investing activities used cash of $1.9 million in the first quarter of 2008
related entirely to our continuing operations. We used cash of $1.6 million
to purchase property, plant, and equipment and $1.2 million of cash associated
with the acquisition of Jining Huayi Light Industry Machinery Co., Ltd. We
received cash of $0.9 million from the sale of property, plant, and
equipment.
Our
financing activities used cash of $9.9 million in the first quarter of 2008
related entirely to our continuing operations. We used cash of $26.0 million in
the first quarter of 2008 to pay off our outstanding long term obligations and
we used cash of $12.0 million to repurchase our common stock on the open
market. We received $28.0 million of proceeds from the issuance of
long-term obligations.
Revolving
Credit Facility
On
February 13, 2008, we entered into a five-year unsecured revolving credit
facility (2008 Credit Agreement) in the aggregate principal amount of up to $75
million, which includes an uncommitted unsecured incremental borrowing facility
of up to an additional $75 million. We can borrow up to $75 million under the
2008 Credit Agreement with a sublimit of $60 million within the 2008 Credit
Agreement available for the issuance of letters of credit and bank guarantees.
The principal on any borrowings made under the 2008 Credit Agreement is due on
February 13, 2013. As of April 4, 2009, the outstanding balance borrowed
under the 2008 Credit Agreement was $38.0 million. The amount we are able to
borrow under the 2008 Credit Agreement is the total borrowing capacity less any
outstanding borrowings, letters of credit and multi-currency borrowings issued
under the 2008 Credit Agreement. As of April 4, 2009, we had $33.5 million of
borrowing capacity available under the committed portion of the 2008 Credit
Agreement.
Our
obligations under the 2008 Credit Agreement may be accelerated upon the
occurrence of an event of default under the 2008 Credit Agreement, which
includes customary events of default including, without limitation, payment
defaults, defaults in the performance of affirmative and negative covenants, the
inaccuracy of representations or warranties, bankruptcy and insolvency related
defaults, defaults relating to such matters as the Employment Retirement Income
Security Act (ERISA), uninsured judgments and the failure to pay certain
indebtedness, and a change of control default.
The 2008
Credit Agreement contains negative covenants applicable to us and our
subsidiaries, including financial covenants requiring us to comply with a
maximum consolidated leverage ratio of 3.5 and a minimum consolidated fixed
charge coverage ratio of 1.2, and restrictions on liens, indebtedness,
fundamental changes, dispositions of property, making certain restricted
payments (including dividends and stock repurchases), investments, transactions
with affiliates, sale and leaseback transactions, swap agreements, changing our
fiscal year, arrangements affecting subsidiary distributions, entering into new
lines of business, and certain actions related to the discontinued operation. As
of April 4, 2009, we were in compliance with these covenants. Our earnings
before interest, taxes, depreciation and amortization (EBITDA), as defined in
the 2008 Credit Agreement, is a factor used in the consolidated leverage and
fixed charge ratios. Based on our projected EBITDA for 2009, we expect to repay
approximately $25 to $30 million of our debt obligations in the latter half of
2009 to stay in compliance with these financial covenants.
Commercial
Real Estate Loan
On
May 4, 2006, we borrowed $10 million under a promissory note (2006
Commercial Real Estate Loan). The 2006 Commercial Real Estate Loan is repayable
in quarterly installments of $125 thousand over a ten-year period with the
remaining principal balance of $5 million due upon maturity. As of April 4,
2009, the remaining balance on the 2006 Commercial Real Estate Loan was $8.6
million.
Our
obligations under the 2006 Commercial Real Estate Loan may be accelerated upon
the occurrence of an event of default under the 2006 Commercial Real Estate Loan
and the Mortgage and Security Agreements, which includes customary events
of
Liquidity
and Capital Resources (continued)
default
including without limitation payment defaults, defaults in the performance of
covenants and obligations, the inaccuracy of representations or warranties,
bankruptcy- and insolvency-related defaults, liens on the properties or
collateral and uninsured judgments. In addition, the occurrence of an event of
default under the 2008 Credit Agreement or any successor credit facility would
be an event of default under the 2006 Commercial Real Estate Loan.
Kadant
Jining, Loan, and Credit Facilities
On
January 28, 2008, our Kadant Jining subsidiary borrowed 40 million
Chinese renminbi, or approximately $5.9 million at the April 4, 2009
exchange rate (2008 Kadant Jining Loan). Principal on the 2008 Kadant Jining
Loan is due as follows: 24 million Chinese renminbi, or approximately $3.5
million, on January 28, 2010 and 16 million Chinese renminbi, or
approximately $2.4 million, on January 28, 2011.
On
July 30, 2008, Kadant Jining and our Kadant Yanzhou subsidiary (Kadant
Yanzhou) each entered into a short-term credit line facility agreement (2008
Facilities) that would allow Kadant Jining to borrow up to an aggregate
principal amount of 45 million Chinese renminbi, or approximately $6.6
million at the April 4, 2009 exchange rate, and Kadant Yanzhou to borrow up to
an aggregate principal amount of 15 million Chinese renminbi, or
approximately $2.2 million at the April 4, 2009 exchange rate. The 2008
Facilities have a term of 364 days and are renewable annually on or before
July 30 at the discretion of the lender. As of April 4, 2009, Kadant Jining
had borrowed $1.7 million under the 2008 Facilities.
Interest
Rate Swap Agreements
To hedge
the exposure to movements in the 3-month LIBOR rate on outstanding debt, on
February 13, 2008, we entered into a swap agreement (2008 Swap Agreement).
The 2008 Swap Agreement has a five-year term and a $15 million notional value,
which decreases to $10 million on December 31, 2010, and $5 million on
December 30, 2011. Under the 2008 Swap Agreement, on a quarterly basis we
will receive a 3-month LIBOR rate and pay a fixed rate of interest of 3.265%. We
also entered into a swap agreement in 2006 (2006 Swap Agreement) to convert the
2006 Commercial Real Estate Loan from a floating to a fixed rate of interest.
The 2006 Swap Agreement has the same terms and quarterly payment dates as the
corresponding debt, and reduces proportionately in line with the amortization of
the 2006 Commercial Real Estate Loan. Under the 2006 Swap Agreement, we will
receive a three-month LIBOR rate and pay a fixed rate of interest of 5.63%. As
of April 4, 2009, we hedged $23.6 million, or 44%, of our outstanding debt
through interest rate swap agreements, which had an unrealized loss of $2.0
million. Our management believes that any credit risk associated with the 2006
and 2008 Swap Agreements is remote based on the creditworthiness of the
financial institution issuing the swap agreements.
Additional
Liquidity and Capital Resources
On
May 5, 2008, our board of directors approved the repurchase by us of up to
$30 million of our equity securities during the period from May 5, 2008
through May 5, 2009. We purchased 1,353,107 shares for $30.0 million in
2008 under this authorization. On October 22, 2008, our board of directors
approved the repurchase by us of up to an additional $30 million of our equity
securities during the period from October 22, 2008 through October 22,
2009. As of April 4, 2009, we had repurchased 494,493 shares of our common stock
for $5.9 million and have $24.1 million remaining under this authorization.
Repurchases under this authorization may be made in public or private
transactions, including under Securities Exchange Act Rule 10b-5-1 trading
plans.
It is our
practice to reinvest indefinitely the earnings of our international
subsidiaries, except in instances in which we can remit such earnings without a
significant associated tax cost. Through April 4, 2009, we have not provided for
U.S. income taxes on approximately $99.6 million of unremitted foreign earnings.
The U.S. tax cost has not been determined due to the fact that it is not
practicable to estimate at this time. The related foreign tax withholding, which
would be required if we remitted the foreign earnings to the U.S., would be
approximately $5.8 million.
It is our
policy to provide for uncertain tax positions and the related interest and
penalties based upon management’s assessment of whether a tax benefit is more
likely than not to be sustained upon examination by tax authorities. At April 4,
2009, we had a liability for unrecognized tax benefits and an accrual for the
payment of interest and penalties totaling $6.9 million. To the extent we
prevail in matters for which a liability for an unrecognized tax benefit is
established or are required to pay amounts in excess of the liability, our
effective tax rate in a given financial statement period may be
affected.
Liquidity
and Capital Resources (continued)
In 2005,
Composites LLC sold its composites business, which is presented as a
discontinued operation in the accompanying condensed consolidated financial
statements. Under the terms of the asset purchase agreement, Composites LLC
retained certain liabilities associated with the operation of the business prior
to the sale, including warranty obligations related to products manufactured
prior to the sale date. Composites LLC retained all of the cash proceeds
received from the asset sale and continued to administer and pay warranty claims
from the sale proceeds into the third quarter of 2007. On September 30,
2007, Composites LLC announced that it no longer had sufficient funds to honor
warranty claims, was unable to pay or process warranty claims, and ceased doing
business. At April 4, 2009, the accrued warranty costs for Composites LLC were
$2.1 million.
Although
we currently have no material commitments for capital expenditures, we plan to
make expenditures of approximately $2 to $3 million during the remainder of 2009
for property, plant, and equipment.
In the
future, our liquidity position will be primarily affected by the level of cash
flows from operations, cash paid to satisfy debt repayments, capital projects,
stock repurchases, or additional acquisitions, if any. We believe that our
existing resources, together with the cash available from our credit facilities
and the cash we expect to generate from continuing operations, will be
sufficient to meet the capital requirements of our current operations for the
foreseeable future.
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 2008 as disclosed in Item 7A of our
Annual Report on Form 10-K for the fiscal year ended January 3, 2009 filed with
the SEC.
Item 4 – Controls and
Procedures
(a) Evaluation
of Disclosure Controls and Procedures
Our
management, under the supervision and with the participation of our Chief
Executive Officer and Chief Financial Officer, evaluated the effectiveness of
our disclosure controls and procedures as of April 4, 2009. The term “disclosure
controls and procedures,” as defined in Securities Exchange Act Rules 13a-15(e)
and 15d-15(e), means controls and other procedures of a company that are
designed to ensure that information required to be disclosed by the company in
the reports that it files or submits under the Exchange Act is recorded,
processed, summarized, and reported, within the time periods specified in the
SEC’s rules and forms. Disclosure controls and procedures include, without
limitation, controls and procedures designed to ensure that information required
to be disclosed by a company in the reports that it files or submits under the
Exchange Act is accumulated and communicated to the company’s management,
including its principal executive and principal financial officers, as
appropriate to allow timely decisions regarding required disclosure. Management
recognizes that any controls and procedures, no matter how well designed and
operated, can provide only reasonable assurance of achieving their objectives
and management necessarily applies its judgment in evaluating the cost-benefit
relationship of possible controls and procedures. Based upon the evaluation of
our disclosure controls and procedures as of April 4, 2009, our Chief Executive
Officer and Chief Financial Officer concluded that as of April 4, 2009, our
disclosure controls and procedures were effective at the reasonable assurance
level.
(b) Changes
in Internal Control Over Financial Reporting
There have not been any changes in our
internal control over financial reporting (as defined in Rules 13a-15(f) and
15d-15(f) under the Securities Exchange Act of 1934, as amended) during the
fiscal quarter ended April 4, 2009 that has materially affected, or is
reasonably likely to materially affect, our internal control over financial
reporting.
PART
II – OTHER INFORMATION
Item 1 – Legal
Proceedings
We have
been named as a co-defendant, together with Composites LLC and another
defendant, in a consumer class action lawsuit filed in the United States
District Court for the District of Massachusetts (the Court) on
December 27, 2007 on behalf of a putative class of individuals who own
GeoDeck™ decking or railing products manufactured by Composites LLC between
April 2002 and October 2003. The complaint in this matter purports to assert,
among other things, causes of action for unfair and deceptive trade practices,
fraud, negligence, breach of warranty and unjust enrichment, and it seeks
compensatory damages and punitive damages under various state consumer
protection statutes, which plaintiffs claim exceed $50 million. On
March 14, 2008, we, Composites LLC, and the other co-defendant filed
motions to dismiss all counts in the complaint. On November 19, 2008, the
Court dismissed the complaint in its entirety, including all claims against us,
Composites LLC, and the other co-defendant. On December 4, 2008, the
plaintiffs sought to vacate this order of dismissal in order to amend their
complaint, and this motion was denied without prejudice by the Court on
January 12, 2009. On January 27, 2009, the plaintiffs renewed their
motion to vacate the order of dismissal in order to amend their complaint, which
motion was opposed by the Company on February 10, 2009 and denied by the Court
on March 3, 2009. On March 27, 2009, the plaintiffs filed an amended notice
of appeal, clarifying an earlier notice and seeking to challenge the Court’s
dismissal on November 19, 2008 and the Court’s denial on March 3, 2009. On April
16, 2009, the Court formally opened the plaintiffs’ appeal and on April 23,
2009, the defendants moved to dismiss as untimely that portion of the
plaintiffs’ appeal seeking to challenge the November 19, 2008 dismissal. The
Court has yet to schedule a hearing on the plaintiffs’ appeal or defendants'
partial motion to dismiss. We intend to defend against this action vigorously,
but there is no assurance we will prevail in such defense. We could incur
significant costs to defend this lawsuit and a judgment or a settlement of the
claims against the defendants could have a material adverse impact on our
condensed consolidated financial results. We have not made an accrual related to
this litigation as we believe that an adverse outcome is not probable and
estimable at this time.
Item 1A – 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 2009 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 worldwide and local economic conditions as well as the
condition of the pulp and paper industry.
We sell
products primarily to the pulp and paper industry, which is a cyclical industry.
Generally, the financial condition of the global pulp and paper industry
corresponds to the condition of the worldwide economy, as well as to a number of
other factors, including pulp and paper production capacity relative to demand.
Recently, worldwide equity and credit markets have been experiencing extreme
volatility and disruption and the markets in which we sell our products, both
globally and locally, are experiencing severe economic downturns, the lengths of
which are difficult to predict. This global uncertainty and turmoil and the
recession in many economies have adversely affected demand for our customers’
products, as well as for our products, especially our capital equipment
products. Our stock-preparation equipment product line has been particularly
affected since it contains a higher proportion of capital products than our
other product lines. The slowing of demand as consumer and economic activity
declines results in reduced demand for paper and board products. This reduced
demand has resulted in an overcapacity situation in many grades of paper,
particularly linerboard, in most regions of the world, which adversely affects
our capital business. In addition, paper producers are lowering their production
rates, which adversely impacts the sales of our products, including parts and
consumables. Also, the crisis affecting financial institutions has caused, and
is likely to continue to cause, liquidity and credit issues for many businesses,
including our customers in the pulp and paper industry as well as other
industries, and results in their inability to fund projects, capacity expansion
plans and, to some extent, routine operations. We expect these factors to
particularly affect planned or proposed projects in developing economies in
Eastern Europe and Russia, which have recently been a source of significant
capital expansion projects for both our stock-preparation and fluid-handling
systems and equipment product lines. These conditions have resulted in a number
of structural changes in the pulp and paper industry, including decreased
spending, mill closures, consolidations, and bankruptcies, all of which
adversely affect our business, revenue, and profitability.
Furthermore,
the inability of our customers to obtain credit may affect our ability to
recognize revenue and income, particularly on large capital equipment orders
from new customers for which we may require letters of credit. We may also be
unable to issue letters of credit to our customers, required in some cases to
guarantee performance, if the economic crisis continues and we exhaust our
existing sources of credit. In addition, paper producers have been and continue
to be negatively affected by higher operating costs, especially higher energy
and chemical costs.
Paper
companies have curtailed their capital and operating spending in the current
economic environment and will likely be cautious about resuming spending, if and
when market conditions improve. As paper companies consolidate in response to
market weakness, they frequently reduce capacity and postpone or even cancel
capacity addition or expansion projects. For example, in China, the worsening
economic conditions have resulted in an oversupply of linerboard as demand has
fallen with the reduction in exports to the U.S. and other countries. Major
paper producers in that country have curtailed production to address the
oversupply and announced delays or cancellations of several new paper machines
used to produce linerboard. Several large projects in Asia and Russia have been
cancelled or delayed by several quarters or into 2010. These cancellations and
delays have caused us to lower our expectations of revenues and earnings per
share for the 2009 fiscal year and may negatively impact us in future years as
well. Our financial performance for 2009 and potentially longer will be
negatively impacted if there are additional delays in customers securing
financing or our customers become unable to secure such financing. In addition,
the ability to accurately forecast revenues and earnings per share is extremely
difficult in the current economic environment.
Certain of our contracts, particularly for stock-preparation and
systems orders, require us to provide a standby letter of credit to a customer
as beneficiary to guarantee our warranty and performance obligations under the
contract. One of our customers has indicated its intention to draw upon all of
the outstanding standby letters of credit, which total $5.8 million. These
letters of credit were issued to secure our warranty and performance obligations
under multiple contracts with that customer and we believe that the reasons for
the draws are principally unrelated to our warranty and performance obligations.
We have and intend to continue to vigorously oppose these draws and any other
potential claims and may incur significant legal expenses in the process, and if we are unsuccessful
we could incur a significant expense that would adversely affect our financial
results. In addition, due to this dispute we currently have poor relations with
this customer, and unless they improve, the loss of this customer could
negatively affect our future revenues.
A significant portion of our
international sales has, and may in the future, come from China and we operate
several manufacturing facilities in China, which exposes us to political,
economic, operational and other risks.
We have historically had significant revenues from China, operate significant
facilities in China, and expect to manufacture and source more of our equipment
and components from China in the future. Our manufacturing facilities in China,
as well as the significant level of revenues from China, expose us to increased
risk in the event of economic slowdowns, 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 or currency
restrictions. In addition, orders from customers in China, particularly for
large stock-preparation systems that have been tailored to a customer’s specific
requirements, have credit risks higher than we generally incur elsewhere, and
some orders are subject to the receipt of financing approvals from the Chinese
government. For this reason, we do not record signed contracts from customers in
China for large stock-preparation systems as orders until we receive the down
payments for such contracts. The timing of the receipt of these orders and the
down payments are uncertain and there is no assurance that we will be able to
recognize revenue on these contracts. We may experience a loss if the contract
is cancelled prior to the receipt of a down payment in the event we commence
engineering or other work associated with the contract. In addition, we may
experience a loss if the contract is cancelled, or the customers do not fulfill
their obligations under the contract, prior to the receipt of a letter of credit
covering the remaining balance of the contract. Typically, the letter of credit
represents 80% or more of the total order.
Worsening
economic conditions have led some customers in China to defer, slow down, or
cancel planned capital projects, especially those dependent on exports to
Western economies, such as linerboard production. These actions will cause us to
recognize revenue on certain contracts in periods later than originally
anticipated, or not at all.
Our
business is subject to economic, currency, political, and other risks associated
with international sales and operations.
During
the first quarters of 2009 and 2008, approximately 63% and 59% of our sales,
respectively, were to customers outside the United States, principally in China
and Europe. In addition, we operate several manufacturing operations worldwide,
including those in Asia, Europe, Mexico, and Brazil. International revenues and
operations are subject to a number of risks, including the
following:
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agreements
may be difficult to enforce and receivables difficult to collect through a
foreign country’s legal system,
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foreign
customers may have longer payment
cycles,
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foreign
countries may impose additional withholding taxes or otherwise tax our
foreign income, impose tariffs, adopt other restrictions on foreign trade,
impose currency restrictions or enact other protectionist or anti-trade
measures,
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worsening
economic conditions may result in worker unrest, labor actions, and
potential work stoppages,
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it
may be difficult to repatriate funds, due to unfavorable tax consequences
or other restrictions or limitations imposed by foreign governments,
and
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the
protection of intellectual property in foreign countries may be more
difficult to enforce.
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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. In addition, our inability to repatriate funds
could adversely affect our ability to service our debt obligations. Any of these
factors could have a material adverse impact on our business and results of
operations. Furthermore, while some risks can be hedged using derivatives or
other financial instruments, or may be insurable, such attempts to mitigate
these risks may be costly and not always successful.
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
performance and innovation. Our competitors include a number of large
multinational corporations that 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. Competitors’ technologies may prove to be superior to
ours. Our current products, those under development, and our ability to develop
new technologies may not be sufficient to enable us to compete effectively.
Competition, especially in China, has increased as new companies enter the
market and existing competitors expand their product lines and manufacturing
operations.
Adverse
changes to the soundness of our suppliers and customers could affect our
business and results of operations.
All of
our businesses are exposed to risk associated with the creditworthiness of our
key suppliers and customers, including pulp and paper manufacturers and other
industrial customers, many of which may be adversely affected by the volatile
conditions in the financial markets, worldwide economic downturns, and worsening
economic conditions. These conditions could result in financial
instability, bankruptcy, or other adverse effects at any of our suppliers or
customers. The consequences of such adverse effects could include the
interruption of production at the facilities of our suppliers, the reduction,
delay or cancellation of customer orders, delays in or the inability of
customers to obtain financing to purchase our products, and bankruptcy of
customers or other creditors. For example, two of our customers in North
America, Smurfit-Stone Container Corporation and Abitibi Bowater Inc., recently
filed for bankruptcy protection, which will adversely affect our revenues and
ability to collect on certain receivables, among other things. Any adverse
changes to the soundness of our suppliers or customers may adversely affect our
cash flow, profitability and financial condition.
Our
debt may adversely affect our cash flow and may restrict our investment
opportunities.
In 2008,
we entered into a five-year unsecured revolving credit facility (2008 Credit
Agreement) in the aggregate principal amount of up to $75 million, which
includes an uncommitted unsecured incremental borrowing facility of up to an
additional $75 million. We had $38 million outstanding under the 2008 Credit
Agreement as of April 4, 2009 and we have also borrowed additional amounts under
other agreements to fund our operations. We may also obtain additional long-term
debt and working capital lines of credit to meet future financing needs, which
would have the effect of increasing our total leverage.
Our
indebtedness could have negative consequences, including:
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increasing
our vulnerability to adverse economic and industry
conditions,
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limiting
our ability to obtain additional
financing,
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limiting
our ability to pay dividends on or to repurchase our capital
stock,
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limiting
our ability to complete a merger or an
acquisition,
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limiting
our ability to acquire new products and technologies through acquisitions
or licensing agreements, and
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limiting
our flexibility in planning for, or reacting to, changes in our business
and the industries in which we
compete.
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Our
existing indebtedness bears interest at floating rates and as a result, our
interest payment obligations on our indebtedness will increase if interest rates
increase. To reduce the exposure to floating rates, we hedged $23.6 million, or
44%, of our outstanding floating rate debt as of April 4, 2009 through interest
rate swap agreements. The unrealized loss associated with these swap agreements
was $2.0 million as of April 4, 2009. This unrealized loss represents the
estimated amount that the swap agreements could be settled for. The counterparty
to the swap agreements could demand an early termination of the swap agreements
if we are in default under the 2008 Credit Agreement, or any agreement that
amends or replaces the 2008 Credit Agreement in which the counterparty is a
member, and we are unable to cure the default. An event of default under the
2008 Credit Agreement includes customary events of default including failure to
comply with a maximum consolidated leverage ratio of 3.5 and a minimum
consolidated fixed charge coverage ratio of 1.2. If these swap agreements were
terminated prior to the scheduled maturity date and if we were required to pay
cash for the value of the swap, we would incur a loss, which would adversely
affect our financial results.
Our
ability to satisfy our obligations and to reduce our total debt depends on our
future operating performance and on economic, financial, competitive, and other
factors beyond our control. Our business may not generate sufficient cash flows
to meet these obligations or to successfully execute our business strategy. The
2008 Credit Agreement includes certain financial covenants requiring us to
comply with a maximum consolidated leverage ratio of 3.5 and a minimum
consolidated fixed charge coverage ratio of 1.2. Our earnings before interest,
taxes, depreciation and amortization (EBITDA), as defined in the 2008 Credit
Agreement, is a factor used in these ratios. As of April 4, 2009, we were in
compliance with these covenants. Based on our projected EBITDA for 2009,
we expect to repay approximately $25 to $30 million of our debt obligations
in the latter half of 2009 to stay in compliance with these financial covenants.
A default under our 2008 Credit Agreement would have significant negative
consequences on our current operations, our swap agreements, and our future
ability to fund our operations and grow our business. If we are unable to
service our debt and fund our business, we may be forced to reduce or delay
capital expenditures or research and development expenditures, seek additional
financing or equity capital, restructure or refinance our debt, or sell assets.
We may not be able to obtain additional financing or refinance existing debt or
sell assets on terms acceptable to us or at all.
Restrictions
in our 2008 Credit Agreement may limit our activities.
Our 2008
Credit Agreement contains, and future debt instruments to which we may become
subject may contain, restrictive covenants that limit our ability to engage in
activities that could otherwise benefit us, including restrictions on our
ability and the ability of our subsidiaries to:
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incur
additional indebtedness,
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pay
dividends on, redeem, or repurchase our capital
stock,
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enter
into transactions with affiliates,
and
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consolidate,
merge, or transfer all or substantially all of our assets and the assets
of our subsidiaries.
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We are
also required to meet specified financial ratios under the terms of our 2008
Credit Agreement. Our ability to comply with these financial restrictions and
covenants is dependent on our future performance, which is subject to prevailing
economic conditions and other factors, including factors that are beyond our
control such as currency exchange rates, interest rates, changes in technology,
and changes in the level of competition.
Our
failure to comply with any of these restrictions or covenants may result in an
event of default under our 2008 Credit Agreement and other loan obligations,
which could permit acceleration of the debt under those instruments and require
us to repay the debt before its scheduled due date.
If an
event of default were to occur, we may not have sufficient funds available to
make the payments required under our indebtedness. If we are unable to repay
amounts owed under our debt agreements, those lenders may be entitled to
foreclose on and sell the collateral that secures our borrowings under the
agreements.
Adverse
changes to the soundness of financial institutions could affect us.
We have
relationships with many financial institutions, including lenders under our
credit facilities and insurance underwriters, and from time to time, we execute
transactions with counterparties in the financial industry, such as our interest
swap arrangements and other hedging transactions. As a consequence of the recent
and continuing volatility in the financial markets, these financial institutions
or counterparties could be adversely affected and we may not be able to access
credit facilities, complete transactions as intended, or otherwise obtain the
benefit of the arrangements we have entered into with such financial parties,
which could adversely affect our business and results of
operations.
The
inability of Kadant Composites LLC to pay claims against it has exposed us to
litigation, which if we are unable to successfully defend, could have a material
adverse effect on our condensed consolidated financial results.
On
October 21, 2005, our Kadant Composites LLC subsidiary (Composites LLC)
sold substantially all of its assets to LDI Composites Co. (Buyer). Under the
terms of the asset purchase agreement, Composites LLC retained certain
liabilities associated with the operation of the business prior to the sale,
including warranty obligations related to products manufactured prior to the
sale date (Retained Liabilities), and, jointly and severally with its parent
company Kadant Inc., agreed to indemnify the Buyer against losses caused to the
Buyer arising from claims associated with the Retained Liabilities. Pursuant to
the asset purchase agreement, the indemnification obligation was contractually
limited to approximately $8.9 million. On May 1, 2009, the Buyer sold the
business to a third party and pursuant to the second amendment to the asset
purchase agreement, among other matters,
the new
buyer was included as an indemnified party and the indemnification obligation
was lowered to $8.4 million. All activity related to this business is classified
in the results of the discontinued operation in our condensed consolidated
financial statements.
Composites
LLC retained all of the cash proceeds received from the asset sale and continued
to administer and pay warranty claims from the sale proceeds into the third
quarter of 2007. On September 30, 2007, Composites LLC announced that it no
longer had sufficient funds to honor warranty claims, was unable to pay or
process warranty claims, and ceased doing business. We are now co-defendants in
a purported consumer class action, together with Composites LLC and another
defendant, arising from these warranty claims, in which the plaintiffs claim
that such damages exceed $50 million. See Part II, Item 1, “Legal
Proceedings” for further information. We could incur substantial costs to defend
ourselves and the Buyer under our indemnification obligations in this lawsuit
and a judgment or a settlement of the claims against the defendants could have a
material adverse impact on our condensed consolidated financial results.
Creditors or other claimants against Composites LLC may seek other parties,
including us, against whom to assert claims. While we believe any such asserted
or possible claims against us or the Buyer would be without merit, the cost of
litigation and the outcome, if we were unable to successfully defend such
claims, could adversely affect our condensed consolidated financial
results.
An
increase in the accrual for warranty costs of the discontinued operation
adversely affects our condensed consolidated financial results.
The
discontinued operation has experienced significant liabilities associated with
warranty claims related to its composite decking products manufactured prior to
the sale date. The accrued warranty costs of the discontinued operation as of
April 4, 2009 represents the low end of the estimated range of warranty costs
required to be recorded under SFAS No. 5, “Accounting for Contingencies” based
on the level of claims received. Composites LLC has calculated that the total
potential warranty cost ranges from $2.1 million to approximately $13.1 million.
The high end of the range represents the estimated maximum level of warranty
claims remaining based on the total sales of the products under warranty. On
September 30, 2007, the discontinued operation ceased doing business and
has no employees or other service providers to collect or process warranty
claims. Composites LLC will continue to record adjustments to accrued warranty
costs to reflect the minimum amount of the potential range of loss for products
under warranty based on judgments entered against it in litigation, which will
adversely affect our consolidated results.
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. Our most recent acquisition was
the Kadant Jining acquisition in June 2006. Any such acquisition involves
numerous risks that may adversely affect our future financial performance and
cash flows. These risks include:
|
–
|
competition
with other prospective buyers resulting in our inability to complete an
acquisition or in us paying substantial premiums over the fair value of
the net assets of the acquired
business,
|
|
–
|
inability
to obtain regulatory approval, including antitrust
approvals,
|
|
–
|
difficulty
in assimilating operations, technologies, products and the key employees
of the acquired business,
|
|
–
|
inability
to maintain existing customers or to sell the products and services of the
acquired business to our existing
customers,
|
|
–
|
diversion
of management’s attention away from other business
concerns,
|
|
–
|
inability
to improve the revenues and profitability or realize the cost savings and
synergies expected in the
acquisition,
|
|
–
|
assumption
of significant liabilities, some of which may be unknown at the
time,
|
|
–
|
potential
future impairment of the value of goodwill and intangible assets acquired,
and
|
|
–
|
identification
of internal control deficiencies of the acquired
business.
|
In the
fourth quarter of 2008, we recorded a $40.3 million impairment charge to write
down the goodwill associated with the stock-preparation reporting unit within
our Papermaking Systems segment. We may incur additional impairment charges to
write down the value of our goodwill and acquired intangible assets in the
future if the assets are not deemed recoverable, which could have a material
adverse affect on our operating results.
We
may be required to reorganize our operations in response to changing conditions
in the worldwide economy and the pulp and paper industry, and such actions may
require significant expenditures and may not be successful.
We have
undertaken various restructuring measures in response to changing market
conditions in the countries in which we operate and in the pulp and paper
industry in general, which have affected our business. We may engage in
additional cost reduction programs in the future. We may not recoup the costs of
programs we have already initiated, or other programs in which we may decide to
engage in the future, the costs of which may be significant. In connection with
any future plant closures, delays
or
failures in the transition of production from existing facilities to our other
facilities in other geographic regions could also adversely affect our results
of operations. In addition, our profitability may decline if our restructuring
efforts do not sufficiently reduce our future costs and position us to maintain
or increase our sales.
Our
fiber-based products business is subject to a number of factors that may
adversely influence its profitability, including high costs of natural gas and
dependence on a few suppliers of raw materials.
We use
natural gas, the price of which is subject to fluctuation, in the production of
our fiber-based granular products. We seek to 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. We may not be able to
effectively manage our exposure to natural gas price fluctuations. Higher costs
of natural gas will adversely affect our consolidated results if we are unable
to effectively manage our exposure or pass these costs on to customers in the
form of surcharges.
We are
dependent on three paper mills for the fiber used in the manufacture of our
fiber-based granular products. Due to process changes at the mills, we have
experienced some difficulty obtaining sufficient raw material to operate at
optimal production levels. We continue to work with the mills to ensure a stable
supply of raw material. To date, we have been able to meet all of our customer
delivery requirements, but there can be no assurance that we will be able to
meet future delivery requirements. Although we believe our relationships with
the mills are good, the mills could decide not to continue to supply sufficient
papermaking byproducts, or may not agree to continue to supply such products on
commercially reasonable terms. If the mills were unable or unwilling to supply
us sufficient fiber, 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 might
prevent prices for our products from being competitive or require closure of the
business.
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 seek
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. 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. 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 share. We
could incur substantial costs to defend ourselves in suits brought against us,
including for alleged infringement of third party rights, or in suits in which
we may assert our intellectual property rights against others. An unfavorable
outcome of any such litigation could have a material adverse effect on 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.
Of particular concern are developing countries, such as China, where the laws,
courts, and administrative agencies may not protect our intellectual property
rights as fully as in the United States or Europe.
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 or our competitors may otherwise gain access to our
intellectual property.
Our
share price will fluctuate.
Stock
markets in general and our common stock in particular have experienced
significant price and volume volatility over the past year. The market price and
trading volume of our common stock may continue to be subject to significant
fluctuations due not only to general stock market conditions but also to a
change in sentiment in the market regarding our operations, business prospects,
or future funding. Given the nature of the markets in which we participate and
the impact of accounting standards related to revenue recognition, we may not be
able to reliably predict future revenues and profitability, and unexpected
changes may cause us to adjust our operations. A large proportion 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 share price
and quarterly operating results include:
|
–
|
failure
of our products to pass contractually agreed upon acceptance tests, which
would delay or prohibit recognition of revenues under applicable
accounting guidelines,
|
|
–
|
changes
in the assumptions used for revenue recognized under the
percentage-of-completion method of
accounting,
|
|
–
|
failure
of a customer, particularly in Asia, to comply with an order’s contractual
obligations or inability of a customer to provide financial assurances of
performance,
|
|
–
|
adverse
changes in demand for and market acceptance of our
products,
|
|
–
|
competitive
pressures resulting in lower sales prices for our
products,
|
|
–
|
adverse
changes in the pulp and paper
industry,
|
|
–
|
delays
or problems in our introduction of new
products,
|
|
–
|
delays
or problems in the manufacture of our
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,
|
|
–
|
changes
in the timing of product orders,
|
|
–
|
fluctuations
in our effective tax rate,
|
|
–
|
the
operating and share price performance of companies that investors consider
to be comparable to us, and
|
|
–
|
changes
in global financial markets and global economies and general market
conditions.
|
Anti-takeover
provisions in our charter documents, under Delaware law, and in our shareholder
rights plan could prevent or delay transactions that our shareholders may
favor.
Provisions
of our charter and bylaws 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 bylaws,
|
|
–
|
eliminate
the ability of our shareholders to call special meetings of
shareholders,
|
|
–
|
prohibit
shareholder action by written consent,
and
|
|
–
|
establish
advance notice requirements for nominations for election to our board of
directors or for proposing matters that can be acted on by shareholders at
shareholder meetings.
|
In
addition, our board of directors has adopted a shareholder rights plan intended
to protect shareholders in the event of an unfair or coercive offer to acquire
our company and to provide our board of directors with adequate time to evaluate
unsolicited offers. Preferred stock purchase rights have been distributed to our
common shareholders pursuant to the rights plan. This rights plan may have
anti-takeover effects. The rights plan will cause substantial dilution to a
person or group that attempts to acquire us on terms that our board of directors
does not believe are in our best interests and those of our shareholders and may
discourage, delay, or prevent a merger or acquisition that shareholders may
consider favorable, including transactions in which shareholders might otherwise
receive a premium for their shares.
Item 2 – Unregistered Sales
of Equity Securities and Use of Proceeds
The following table provides
information about purchases by us of our common stock during the first quarter
of 2009:
Issuer Purchases of Equity
Securities
|
|
Period
|
|
Total
Number of Shares Purchased (1)
|
|
|
Average
Price Paid per Share
|
|
|
Total
Number of Shares Purchased as Part of Publicly Announced Plans
(1)
|
|
|
Approximate
Dollar Value of Shares that May Yet Be
Purchased
Under
the Plans
|
|
1/4/09
– 1/31/09
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
$ |
27,003,554 |
|
2/1/09
– 2/29/09
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
$ |
27,003,554 |
|
3/1/09
– 4/4/09
|
|
|
289,800
|
|
|
$ |
9.98
|
|
|
|
289,800
|
|
|
$ |
24,112,548
|
|
Total:
|
|
|
289,800
|
|
|
$ |
9.98
|
|
|
|
289,800
|
|
|
|
|
|
(1)
|
On
October 22, 2008, our board of directors approved the repurchase by
us of up to $30 million of our equity securities during the period from
October 22, 2008 through October 22, 2009. Repurchases may be
made in public or private transactions, including under Securities
Exchange Act Rule 10b-5-1 trading plans. As of April 4, 2009, we had
repurchased 494,493 shares of our common stock for $5.9 million under this
authorization.
|
Item 5 – Other
Information
Not
applicable.
Item 6 –
Exhibits
See Exhibit Index on the page
immediately preceding exhibits.
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
13th day of May, 2009.
|
KADANT
INC.
|
|
|
|
|
|
Thomas
M. O’Brien
|
|
Executive
Vice President and Chief Financial Officer
|
|
(Principal
Financial Officer)
|
EXHIBIT
INDEX
Exhibit
|
|
|
Number
|
|
Description
of Exhibit
|
|
|
|
2.1
|
|
Second
Amendment dated as of May 1, 2009 to the Asset Purchase Agreement dated as
of October 21, 2005, among the Registrant, Kadant Composites LLC, a
Delaware limited liability company and a subsidiary of the Registrant, LDI
Composites Co., a Minnesota corporation, and Liberty Diversified
Industries, Inc., a Minnesota corporation and parent company of LDI
Composites Co.
|
|
|
|
10.1*
|
|
Form
of Performance-Based Restricted Stock Unit Agreement between the
Registrant and its
executive officers used for restricted stock unit awards granted on
and after March 3, 2009.
|
|
|
|
31.1
|
|
Certification
of the Principal Executive Officer of the Registrant Pursuant to Rule
13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act of 1934, as
amended.
|
|
|
|
31.2
|
|
Certification
of the Principal Financial Officer of the Registrant Pursuant to Rule
13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act of 1934, as
amended.
|
|
|
|
32
|
|
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 the
Sarbanes-Oxley Act of 2002.
|
|
|
|
*
Management contract or compensatory plan or arrangement.