KAI Form 10-Q 1Q2007
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 March 31,
2007
|
OR
¨
|
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 is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of “accelerated
filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.
Large
accelerated filer o
|
Accelerated
filer x
|
Non-accelerated
filer 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.
|
|
|
Class
|
|
Outstanding
at May 2, 2007
|
|
|
Common
Stock, $.01 par value
|
|
13,935,124
|
|
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
KADANT
INC.
Condensed
Consolidated Balance Sheet
(Unaudited)
Assets
|
|
March
31,
|
|
December
30,
|
|
(In
thousands)
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
Current
Assets:
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
41,233
|
|
$
|
39,634
|
|
Accounts
receivable, less allowances of $2,707 and $2,623
|
|
|
48,735
|
|
|
49,963
|
|
Unbilled
contract costs and fees
|
|
|
20,894
|
|
|
24,087
|
|
Inventories
(Note 5)
|
|
|
42,949
|
|
|
41,679
|
|
Other
current assets
|
|
|
9,628
|
|
|
8,575
|
|
Assets
of discontinued operation (Note 14)
|
|
|
3,794
|
|
|
4,461
|
|
Total
Current Assets
|
|
|
167,233
|
|
|
168,399
|
|
|
|
|
|
|
|
|
|
Property,
Plant, and Equipment, at Cost
|
|
|
99,640
|
|
|
97,995
|
|
Less:
accumulated
depreciation and amortization
|
|
|
58,901
|
|
|
57,056
|
|
|
|
|
40,739
|
|
|
40,939
|
|
|
|
|
|
|
|
|
|
Other
Assets
|
|
|
12,437
|
|
|
11,983
|
|
|
|
|
|
|
|
|
|
Intangible
Assets
|
|
|
33,949
|
|
|
34,686
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
|
137,631
|
|
|
137,078
|
|
|
|
|
|
|
|
|
|
Total
Assets
|
|
$
|
391,989
|
|
$
|
393,085
|
|
The
accompanying notes are an integral part of these condensed consolidated
financial statements.
Condensed
Consolidated Balance Sheet (continued)
(Unaudited)
Liabilities
and Shareholders’ Investment
|
|
March
31,
|
|
December
30,
|
|
(In
thousands, except share amounts)
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
Current
Liabilities:
|
|
|
|
|
|
Current
maturities of long-term obligations (Note 7)
|
|
$
|
10,086
|
|
$
|
9,330
|
|
Accounts
payable
|
|
|
36,495
|
|
|
32,934
|
|
Accrued
payroll and employee benefits
|
|
|
11,647
|
|
|
15,685
|
|
Customer
deposits
|
|
|
7,944
|
|
|
8,688
|
|
Accrued
income taxes
|
|
|
4,060
|
|
|
2,984
|
|
Billings
in excess of contract costs and fees
|
|
|
945
|
|
|
1,442
|
|
Other
current liabilities
|
|
|
17,208
|
|
|
15,335
|
|
Liabilities
of discontinued operation (Note 14)
|
|
|
1,316
|
|
|
1,459
|
|
Total
Current Liabilities
|
|
|
89,701
|
|
|
87,857
|
|
|
|
|
|
|
|
|
|
Deferred
Income Taxes
|
|
|
8,562
|
|
|
8,761
|
|
|
|
|
|
|
|
|
|
Other
Long-Term Liabilities
|
|
|
11,921
|
|
|
12,833
|
|
|
|
|
|
|
|
|
|
Long-Term
Obligations (Note 7)
|
|
|
42,064
|
|
|
44,652
|
|
|
|
|
|
|
|
|
|
Minority
Interest
|
|
|
1,081
|
|
|
1,017
|
|
|
|
|
|
|
|
|
|
Shareholders’
Investment:
|
|
|
|
|
|
|
|
Preferred
stock, $.01 par value, 5,000,000 shares authorized;
none
issued
|
|
|
-
|
|
|
-
|
|
Common
stock, $.01 par value, 150,000,000 shares authorized;
14,604,520
shares issued
|
|
|
146
|
|
|
146
|
|
Capital
in excess of par value
|
|
|
92,659
|
|
|
93,002
|
|
Retained
earnings
|
|
|
156,737
|
|
|
153,147
|
|
Treasury
stock at cost, 747,729 and 616,737 shares
|
|
|
(17,839
|
)
|
|
(14,401
|
)
|
Accumulated
other comprehensive items (Note 2)
|
|
|
6,957
|
|
|
6,071
|
|
|
|
|
238,660
|
|
|
237,965
|
|
|
|
|
|
|
|
|
|
Total
Liabilities and Shareholders’ Investment
|
|
$
|
391,989
|
|
$
|
393,085
|
|
The
accompanying notes are an integral part of these condensed consolidated
financial statements.
Condensed
Consolidated Statement of Income
(Unaudited)
|
|
Three
Months Ended
|
|
|
|
March
31,
|
|
April
1,
|
|
(In
thousands, except per share amounts)
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
88,241
|
|
$
|
75,591
|
|
|
|
|
|
|
|
|
|
Costs
and Operating Expenses:
|
|
|
|
|
|
|
|
Cost
of revenues
|
|
|
55,694
|
|
|
46,974
|
|
Selling,
general, and administrative expenses
|
|
|
23,496
|
|
|
22,121
|
|
Research
and development expenses
|
|
|
1,667
|
|
|
1,545
|
|
Restructuring
costs
|
|
|
-
|
|
|
138
|
|
|
|
|
|
|
|
|
|
|
|
|
80,857
|
|
|
70,778
|
|
|
|
|
|
|
|
|
|
Operating
Income
|
|
|
7,384
|
|
|
4,813
|
|
|
|
|
|
|
|
|
|
Interest
Income
|
|
|
351
|
|
|
259
|
|
Interest
Expense
|
|
|
(806
|
)
|
|
(794
|
)
|
|
|
|
|
|
|
|
|
Income
from Continuing Operations Before Provision for
Income
Taxes and Minority Interest Expense
|
|
|
6,929
|
|
|
4,278
|
|
Provision
for Income Taxes
|
|
|
2,190
|
|
|
1,455
|
|
Minority
Interest Expense
|
|
|
48
|
|
|
58
|
|
|
|
|
|
|
|
|
|
Income
from Continuing Operations
|
|
|
4,691
|
|
|
2,765
|
|
Loss
from Discontinued Operation (net of income tax benefit
of
$237 and $77) (Note 14)
|
|
|
(392
|
)
|
|
(114
|
)
|
|
|
|
|
|
|
|
|
Net
Income
|
|
$
|
4,299
|
|
$
|
2,651
|
|
|
|
|
|
|
|
|
|
Basic
Earnings per Share (Note 3):
|
|
|
|
|
|
|
|
Continuing
Operations
|
|
$
|
.33
|
|
$
|
.20
|
|
Discontinued
Operation
|
|
|
(.02
|
)
|
|
-
|
|
Net
Income
|
|
$
|
.31
|
|
$
|
.20
|
|
|
|
|
|
|
|
|
|
Diluted
Earnings per Share (Note 3):
|
|
|
|
|
|
|
|
Continuing
Operations
|
|
$
|
.33
|
|
$
|
.20
|
|
Discontinued
Operation
|
|
|
(.03
|
)
|
|
(.01
|
)
|
Net
Income
|
|
$
|
.30
|
|
$
|
.19
|
|
|
|
|
|
|
|
|
|
Weighted
Average Shares (Note 3):
|
|
|
|
|
|
|
|
Basic
|
|
|
14,007
|
|
|
13,580
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
14,214
|
|
|
13,841
|
|
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of these condensed consolidated
financial statements.
Condensed
Consolidated Statement of Cash Flows
(Unaudited)
|
|
Three
Months Ended
|
|
|
|
March
31,
|
|
April
1,
|
|
(In
thousands)
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
Operating
Activities:
|
|
|
|
|
|
Net
income
|
|
$
|
4,299
|
|
$
|
2,651
|
|
Loss
from discontinued operation (Note 14)
|
|
|
392
|
|
|
114
|
|
Income
from continuing operations
|
|
|
4,691
|
|
|
2,765
|
|
Adjustments
to reconcile income from continuing operations to net cash provided
by
operating activities:
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
1,757
|
|
|
1,930
|
|
Stock-based
compensation expense
|
|
|
214
|
|
|
212
|
|
Provision
for losses on accounts receivable
|
|
|
160
|
|
|
314
|
|
Minority
interest expense
|
|
|
48
|
|
|
58
|
|
Other,
net
|
|
|
(3
|
)
|
|
390
|
|
Changes
in current accounts:
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
1,335
|
|
|
(1,536
|
)
|
Unbilled
contract costs and fees
|
|
|
3,242
|
|
|
(1,614
|
)
|
Inventories
|
|
|
(952
|
)
|
|
(286
|
)
|
Other
current assets
|
|
|
(1,094
|
)
|
|
(1,000
|
)
|
Accounts
payable
|
|
|
3,371
|
|
|
8,730
|
|
Other
current liabilities
|
|
|
(6,317
|
)
|
|
(8,281
|
)
|
Net
cash provided by continuing operations
|
|
|
6,452
|
|
|
1,682
|
|
Net
cash (used in) provided by discontinued operation
|
|
|
(575
|
)
|
|
65
|
|
Net
cash provided by operating activities
|
|
|
5,877
|
|
|
1,747
|
|
|
|
|
|
|
|
|
|
Investing
Activities:
|
|
|
|
|
|
|
|
Purchases
of property, plant, and equipment
|
|
|
(838
|
)
|
|
(383
|
)
|
Proceeds
from sale of property, plant, and equipment
|
|
|
97
|
|
|
13
|
|
Acquisition
costs paid
|
|
|
-
|
|
|
(311
|
)
|
Other,
net
|
|
|
147
|
|
|
208
|
|
Net
cash used in continuing operations
|
|
|
(594
|
)
|
|
(473
|
)
|
Net
cash (used in) provided by discontinued operation
|
|
|
(8
|
)
|
|
746
|
|
Net
cash (used in) provided by investing activities
|
|
|
(602
|
)
|
|
273
|
|
|
|
|
|
|
|
|
|
Financing
Activities:
|
|
|
|
|
|
|
|
Purchases
of Company common stock
|
|
|
(3,760
|
)
|
|
-
|
|
Repayments
of long-term obligations
|
|
|
(1,892
|
)
|
|
(2,250
|
)
|
Net
proceeds from issuances of Company common stock
|
|
|
1,047
|
|
|
546
|
|
Other,
net
|
|
|
171
|
|
|
57
|
|
Net
cash used in continuing operations
|
|
|
(4,434
|
)
|
|
(1,647
|
)
|
Net
cash (used in) provided by discontinued operation
|
|
|
-
|
|
|
-
|
|
Net
cash used in financing activities
|
|
|
(4,434
|
)
|
|
(1,647
|
)
|
|
|
|
|
|
|
|
|
Exchange
Rate Effect on Cash
|
|
|
43
|
|
|
140
|
|
|
|
|
|
|
|
|
|
Change
in Cash from Discontinued Operation
|
|
|
715
|
|
|
(55
|
)
|
|
|
|
|
|
|
|
|
Increase
in Cash and Cash Equivalents
|
|
|
1,599
|
|
|
458
|
|
Cash
and Cash Equivalents at Beginning of Period
|
|
|
39,634
|
|
|
40,822
|
|
Cash
and Cash Equivalents at End of Period
|
|
$
|
41,233
|
|
$
|
41,280
|
|
See
Note
1 for supplemental cash flow information.
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 March 31,
2007, and its results of operations and cash flows for the three-month periods
ended March 31, 2007 and April 1, 2006. Interim results are not necessarily
indicative of results for a full year.
The
condensed consolidated balance sheet presented as of December 30, 2006, 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
December 30, 2006, filed with the Securities and Exchange
Commission.
Certain
prior-period amounts have been reclassified to conform to the 2007 presentation.
Supplemental
Cash Flow Information
|
|
Three
Months Ended
|
|
|
|
March
31,
|
|
April
1,
|
|
(In
thousands)
|
|
2007
|
|
2006
|
|
Non-cash
Financing Activities:
|
|
|
|
|
|
Issuance
of Restricted Stock
|
|
$
|
116
|
|
$
|
227
|
|
2. Comprehensive
Income
Comprehensive
income combines net income and other comprehensive items, which 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 income are as follows:
|
|
Three
Months Ended
|
|
|
|
March
31,
|
|
April
1,
|
|
(In
thousands)
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
Net
Income
|
|
$
|
4,299
|
|
$
|
2,651
|
|
Other
Comprehensive Items:
|
|
|
|
|
|
|
|
Foreign
Currency Translation Adjustment
|
|
|
1,044
|
|
|
428
|
|
Unrecognized
Prior Service Loss (net of income tax of $74)
|
|
|
(111
|
)
|
|
-
|
|
Deferred Gain on Pension and Other Post-Retirement Plans (net of
income
tax of $3)
|
|
|
6
|
|
|
-
|
|
Deferred (Loss) Gain on Hedging Instruments (net of income tax of
$41 and
$102 in 2007 and 2006, respectively)
|
|
|
(53
|
)
|
|
154
|
|
|
|
|
886
|
|
|
582
|
|
Comprehensive
Income
|
|
$
|
5,185
|
|
$
|
3,233
|
|
Notes
to
Condensed Consolidated Financial Statements
(Unaudited)
3. Earnings
per Share
Basic
and
diluted earnings per share are calculated as follows:
|
|
Three
Months Ended
|
|
|
|
March
31,
|
|
April
1,
|
|
(In
thousands,
except per share amounts)
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
Income
from Continuing Operations
|
|
$
|
4,691
|
|
$
|
2,765
|
|
Loss
from Discontinued Operation
|
|
|
(392
|
)
|
|
(114
|
)
|
|
|
|
|
|
|
|
|
Net
Income
|
|
$
|
4,299
|
|
$
|
2,651
|
|
|
|
|
|
|
|
|
|
Basic
Weighted Average Shares
|
|
|
14,007
|
|
|
13,580
|
|
Effect
of Stock Options
|
|
|
207
|
|
|
261
|
|
Diluted
Weighted Average Shares
|
|
|
14,214
|
|
|
13,841
|
|
Basic
Earnings per Share:
|
|
|
|
|
|
Continuing
Operations
|
|
$
|
.33
|
|
$
|
.20
|
|
Discontinued
Operation
|
|
|
(.02
|
)
|
|
-
|
|
Net
Income
|
|
$
|
.31
|
|
$
|
.20
|
|
|
|
|
|
|
|
|
|
Diluted
Earnings per Share:
|
|
|
|
|
|
|
|
Continuing
Operations
|
|
$
|
.33
|
|
$
|
.20
|
|
Discontinued
Operation
|
|
|
(.03
|
)
|
|
(.01
|
)
|
Net
Income
|
|
$
|
.30
|
|
$
|
.19
|
|
Options
to purchase approximately 74,100 and 241,600 shares of common stock for the
first quarters of 2007 and 2006, 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.
4. Acquisition
On
June 2, 2006, the Company’s subsidiary, Kadant Light Machinery (Jining)
Co., Ltd. (Kadant Jining), assumed responsibility for the operation of Jining
Huayi Light Industry Machinery Co., Ltd. (Huayi), and, by September 30,
2006, acquired substantially all of the assets of Huayi including cash,
inventory, machinery, equipment, and buildings for $21,109,000, net of assumed
liabilities of $2,253,000 related primarily to acquired customer deposits
(Kadant Jining acquisition). Of the total consideration, $17,674,000 was paid
in
cash, including $988,000 for acquisition-related costs. To finance a portion
of
the purchase price, Kadant Jining borrowed 40 million Chinese renminbi,
originally translated at $5,072,000. The remaining purchase obligation of
$3,435,000, which is included in other current liabilities in the accompanying
condensed consolidated balance sheet, will be paid through January 2008 as
certain post-closing and indemnification obligations are satisfied. The Company
expects to fund the remaining purchase obligation through a combination of
cash
and borrowings in China. Pursuant to the asset purchase agreement, Kadant Jining
issued bank payment guarantees of $3,435,000 associated with the remaining
purchase obligation, which may be drawn upon by the sellers through January
2008
as certain obligations are satisfied. Huayi was a supplier of stock-preparation
equipment in China.
Notes
to
Condensed Consolidated Financial Statements
(Unaudited)
4. Acquisition
(continued)
This
acquisition was accounted for under the purchase method of accounting and the
operating results for Kadant Jining have been included in the accompanying
condensed consolidated financial statements from the acquisition date of
June 2, 2006. The following table summarizes the preliminary purchase price
allocation for this acquisition and the estimated fair values of assets acquired
and liabilities assumed (in thousands):
|
|
|
|
Allocation
of Purchase Price as of March 31, 2007:
|
|
|
|
Cash
and Cash Equivalents
|
|
$
|
2,180
|
|
Inventory
|
|
|
2,542
|
|
Other
Current Assets
|
|
|
415
|
|
Property,
Plant, and Equipment
|
|
|
8,928
|
|
Other
Assets
|
|
|
3,253
|
|
Intangibles
|
|
|
608
|
|
Goodwill
|
|
|
5,436
|
|
|
|
|
|
|
Total
Assets Acquired
|
|
|
23,362
|
|
|
|
|
|
|
Current
Liabilities Assumed
|
|
|
2,253
|
|
|
|
|
|
|
Net
Assets Acquired
|
|
$
|
21,109
|
|
|
|
|
|
|
Consideration:
|
|
|
|
|
Cash
|
|
$
|
11,614
|
|
Debt
|
|
|
5,072
|
|
Short-
and Long-Term Obligations
|
|
|
3,435
|
|
Acquisition
Costs
|
|
|
988
|
|
|
|
|
|
|
Total
Consideration
|
|
$
|
21,109
|
|
The
allocation of the purchase price was based on estimates of the fair value of
the
assets acquired and is subject to adjustment upon finalization of the purchase
price allocation. Intangibles of $608,000 relate to customer relationships
with
a 5 year useful life. The excess of the purchase price over the tangible and
identifiable intangible assets was recorded as goodwill and amounted to
approximately $5,436,000, which is fully deductible for tax purposes.
Pro
forma
disclosure of the results of operations as if the Kadant Jining acquisition
had
occurred at the beginning of 2006 is not required, as the acquisition did not
meet the definition of a material business combination outlined in Statement
of
Financial Accounting Standards (SFAS) No. 141, “Business Combinations.”
5. Inventories
The
components of inventories are as follows:
|
|
March
31,
|
|
December
30,
|
|
(In
thousands)
|
|
2007
|
|
2006
|
|
Raw
Materials and Supplies
|
|
$
|
22,650
|
|
$
|
22,418
|
|
Work
in Process
|
|
|
10,043
|
|
|
9,916
|
|
Finished
Goods (includes $517 and $624 at customer locations)
|
|
|
10,256
|
|
|
9,345
|
|
|
|
$
|
42,949
|
|
$
|
41,679
|
|
Notes
to
Condensed Consolidated Financial Statements
(Unaudited)
6. Income
Taxes
The
Company adopted Financial Accounting Standards Board (FASB) Interpretation
No.
48 (FIN 48), “Accounting for Uncertainty in Income Taxes - An Interpretation of
FASB Statement No. 109” on December 31, 2006. In accordance with FIN 48, the
Company recognized a cumulative-effect adjustment of $709,000, increasing its
liability for unrecognized
tax benefits and reducing the December 31, 2006 balance of retained earnings.
At
December 31, 2006, the Company had $3,364,000 of unrecognized tax benefits.
Included in the balance of unrecognized tax benefits at December 31, 2006,
is
$1,828,000 of tax positions, the disallowance of which would not affect the
annual effective tax rate. The Company recognizes accrued interest and penalties
related to unrecognized tax benefits in income tax expense. At December 31,
2006, the Company had accrued $652,000 and $490,000 for the potential payment
of
interest and penalties, respectively. There were no significant changes to
any
of the December 31, 2006 amounts during the first quarter of 2007 and the
Company does not anticipate that the total amount of unrecognized tax benefit
related to any particular tax position will change significantly within the
next
12 months.
As
of
December 31, 2006, the Company was subject to U.S. Federal income tax
examinations for the tax years 2003 through 2006, and to non-U.S. income tax
examinations for the tax years of 2001 through 2006. In addition, the Company
was subject to state and local income tax examinations for the tax years 2002
through 2006.
7. Long-Term
Obligations and Other Financial Instruments
Long-term
Obligations
Long-term
obligations are as follows:
|
|
March
31,
|
|
December
30,
|
|
(In
thousands)
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
Variable
Rate Term Loan, due from 2007 to 2010
|
|
$
|
37,216
|
|
$
|
39,108
|
|
Variable
Rate Term Loan, due from 2007 to 2016
|
|
|
9,750
|
|
|
9,750
|
|
Variable
Rate Term Loan, due 2010
|
|
|
5,184
|
|
|
5,124
|
|
Total
Long-Term Obligations
|
|
|
52,150
|
|
|
53,982
|
|
Less:
Current Maturities
|
|
|
(10,086
|
)
|
|
(9,330
|
)
|
Long-Term
Obligations, less Current Maturities
|
|
$
|
42,064
|
|
$
|
44,652
|
|
The
weighted average interest rate for long-term obligations was 5.52% as of March
31, 2007.
Term
Loan and Revolving Credit Facility
To
fund a
portion of the purchase price for the acquisition of Kadant Johnson, the Company
entered into a term loan and revolving credit facility (the Credit Agreement)
effective May 9, 2005 in the aggregate principal amount of up to
$95,000,000, including a $35,000,000 revolver. The Credit Agreement is among
the
Company, as Borrower; the Foreign Subsidiary Borrowers from time to time parties
thereto; the several banks and other financial institutions or entities from
time to time parties thereto; and JPMorgan Chase Bank, N.A., as Administrative
Agent. On May 11, 2005, the Company borrowed $60,000,000 under the term
loan facility, which is repayable in quarterly installments over a five-year
period.
Commercial
Real Estate Loan
On
May 4, 2006, the Company borrowed $10,000,000 under a promissory note
(Loan) from Citizens Bank of Massachusetts (Lender). The Loan 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.
Kadant
Jining Loan
On
June 6, 2006, Kadant Jining borrowed 40 million Chinese renminbi, or
approximately $5,184,000 at March 31, 2007, under a 47-month interest-only
loan
with Bank of China Limited.
Notes
to
Condensed Consolidated Financial Statements
(Unaudited)
7. Long-Term
Obligations and Other Financial Instruments (continued)
Financial
Instruments
The
Company entered into swap agreements in 2005 and 2006 to convert a portion
of
the Company’s outstanding debt from floating to fixed rates of interest. As of
March 31, 2007, $36,300,000, or 70%, of our outstanding debt was hedged through
interest rate swap agreements. The swap agreements have the same terms and
quarterly payment dates as the corresponding debt, and reduce proportionately
in
line with the amortization of the debt. The swap agreements have been designated
as cash flow hedges and are carried at fair value with unrealized gains or
losses reflected within other comprehensive items. As of March 31, 2007, the
net
unrealized gain associated with the swap agreements was $23,000, which is
included in other assets (for unrealized gains) and other liabilities (for
unrealized losses) with an offset to accumulated other comprehensive items
(net
of tax) in the accompanying condensed consolidated balance sheet. 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.
8. 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)
|
|
March
31,
2007
|
|
April
1,
2006
|
|
|
|
|
|
|
|
Balance
at Beginning of Period
|
|
$
|
3,164
|
|
$
|
2,836
|
|
Provision
charged to income
|
|
|
514
|
|
|
233
|
|
Usage
|
|
|
(546
|
)
|
|
(290
|
)
|
Currency
translation
|
|
|
17
|
|
|
8
|
|
Balance
at End of Period
|
|
$
|
3,149
|
|
$
|
2,787
|
|
|
|
|
|
|
|
|
|
See
Note
14 for warranty information related to the discontinued operation.
9. Restructuring
Costs
2004
Restructuring Plan
In
an
effort to improve operating performance at the Papermaking Systems segment’s
Kadant Lamort subsidiary in France, the Company approved a restructuring of
that
subsidiary on November 18, 2004. This restructuring was initiated to
strengthen Kadant Lamort’s competitive position in the European paper industry.
The restructuring primarily included the reduction of 97 full-time positions
across all functions in France and was implemented in 2005. The Company accrued
a restructuring charge, in accordance with SFAS No. 112, “Employers’
Accounting for Postemployment Benefits,” for severance and other termination
costs in connection with the workforce reduction of $9,235,000 in 2004 and
reduced the estimate by $71,000 in 2005. In addition, during 2004, the Company
recorded restructuring costs of $280,000 related to severance costs of 11
employees at one of the Papermaking Systems segment’s U.S. subsidiaries.
Notes
to
Condensed Consolidated Financial Statements
(Unaudited)
9. Restructuring
Costs (continued)
2006
Restructuring Plan
The
Company recorded restructuring costs of $677,000 in the fourth quarter of 2006
associated with its 2006 Restructuring Plan. These restructuring costs were
comprised of severance and associated costs related to the reduction of 15
full-time positions in Canada and France, all at its Papermaking Systems
segment.
A
summary
of the changes in accrued restructuring costs is as follows:
(In
thousands)
|
|
Severance
&
Other
|
|
|
|
|
|
2004
Restructuring Plan
|
|
|
|
Balance
at December 30,
2006
|
|
$
|
365
|
|
Usage
|
|
|
(34
|
)
|
Currency
Translation
|
|
|
5
|
|
Balance
at March
31, 2007
|
|
$
|
336
|
|
|
|
|
|
|
2006
Restructuring Plan
|
|
|
|
|
Balance
at December 30,
2006
|
|
$
|
606
|
|
Usage
|
|
|
(91
|
)
|
Currency
Translation
|
|
|
3
|
|
Balance
at March
31, 2007
|
|
$
|
518
|
|
|
|
|
|
|
The
specific restructuring measures and associated estimated costs are based on
the
Company’s best judgments under prevailing circumstances. The Company believes
that the restructuring reserve balance is adequate to carry out the
restructuring activities formally identified and committed to as of March 31,
2007. The cash payments related to the Lamort restructuring initiated at the
end
of 2004 will extend through the remainder of 2007 due to the lengthy
restructuring and legal process in France. For the remaining restructuring
activities, the Company anticipates that all actions will be completed within
a
12-month period.
Notes
to
Condensed Consolidated Financial Statements
(Unaudited)
10. Business
Segment Information
The
Company has combined its operating entities into one reportable operating
segment, Papermaking Systems, and two separate product lines, Fiber-based
Products and Casting Products, which are 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
|
|
|
|
March
31,
|
|
April
1,
|
|
(In
thousands)
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
Papermaking
Systems
|
|
$
|
84,034
|
|
$
|
71,073
|
|
Other
|
|
|
4,207
|
|
|
4,518
|
|
|
|
$
|
88,241
|
|
$
|
75,591
|
|
|
|
|
|
|
|
|
|
Income
from Continuing Operations Before Provision for
Income
Taxes and Minority Interest Expense:
|
|
|
|
|
|
|
|
Papermaking
Systems
|
|
$
|
9,570
|
|
$
|
6,751
|
|
Corporate
and Other (a)
|
|
|
(2,186
|
)
|
|
(1,938
|
)
|
Total
Operating Income
|
|
|
7,384
|
|
|
4,813
|
|
Interest
Income (Expense), Net
|
|
|
(455
|
)
|
|
(535
|
)
|
|
|
$
|
6,929
|
|
$
|
4,278
|
|
|
|
|
|
|
|
|
|
Capital
Expenditures:
|
|
|
|
|
|
|
|
Papermaking
Systems
|
|
$
|
775
|
|
$
|
337
|
|
Corporate
and Other
|
|
|
63
|
|
|
46
|
|
|
|
$
|
838
|
|
$
|
383
|
|
(a) Corporate
primarily includes general and administrative expenses.
11. Stock-Based
Compensation
Stock
Options
- There
were no stock options granted in the first quarter of 2007.
Restricted
Stock
- The
Company grants restricted shares to its outside directors. For 2006 and prior
periods, the restricted shares vested immediately, but were restricted from
resale for three years from the date of award. On February 27, 2007, the Company
granted an aggregate of 20,000 restricted shares to its outside directors with
an aggregate value of $464,000, which vest at a rate of 5,000 shares per quarter
on the last day of each quarter. The vesting for these restricted shares would
accelerate upon a change in control of the Company, as defined in the Company’s
equity incentive plans. As of March 31, 2007, there was $348,000 of total
unrecognized compensation cost related to these unvested awards, which will
be
recognized over the remainder of 2007 as the shares vest. On February 27, 2007,
the Company also granted an aggregate of 40,000 restricted shares to its outside
directors, which will only vest upon a change in control, as defined in the
Company’s equity incentive plans. These restricted shares are forfeited if a
change of control does not occur by the end of the first quarter of
2008.
Notes
to
Condensed Consolidated Financial Statements
(Unaudited)
11. Stock-Based
Compensation (continued)
A
summary
of the status of the Company’s unvested restricted shares for the quarter ended
March 31, 2007 is as follows:
|
|
Shares
(In
thousands)
|
|
Weighted
Average Grant-Date Fair Value
|
|
|
|
|
|
|
|
Unvested
at
December 30, 2006
|
|
|
-
|
|
|
-
|
|
Granted
|
|
|
60
|
|
$
|
23.20
|
|
Vested
|
|
|
(5
|
)
|
$
|
23.20
|
|
Forfeited
/ Expired
|
|
|
-
|
|
|
-
|
|
Unvested
at
March 31, 2007
|
|
|
55
|
|
$
|
23.20
|
|
12. Employee
Benefit Plans
Defined
Benefit Pension Plans and Post-Retirement Welfare Benefit
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. Effective January 1, 2007, the provision limiting lump
sum distributions upon termination of employment to $10,000 was removed. 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, and the plans include limits on the
subsidiary’s contributions.
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 post-retirement
benefit plan was amended to reduce the annual subsidy provided under the plan
effective January 1, 2007. In addition, this plan will be closed to
employees who will not meet its retirement eligibility requirements on
January 1, 2012.
Notes
to
Condensed Consolidated Financial Statements
(Unaudited)
12. Employee
Benefit Plans (continued)
The
components of the net periodic benefit cost for the pension benefits and other
benefits plans in the first quarters of 2007 and 2006 are as
follows:
|
|
Three
Months Ended
|
|
Three
Months Ended
|
|
(In
thousands)
|
|
March
31, 2007
|
|
April
1, 2006
|
|
|
|
Pension
Benefits
|
|
Other
Benefits
|
|
Pension
Benefits
|
|
Other
Benefits
|
|
|
|
|
|
|
|
|
|
|
|
Components
of Net Periodic Benefit Cost
(Income):
|
|
|
|
|
|
|
|
Service
cost
|
|
$
|
208
|
|
$
|
25
|
|
$
|
195
|
|
$
|
59
|
|
Interest
cost
|
|
|
276
|
|
|
57
|
|
|
264
|
|
|
91
|
|
Expected
return on plan assets
|
|
|
(370
|
)
|
|
-
|
|
|
(353
|
)
|
|
-
|
|
Recognized
net actuarial loss
|
|
|
-
|
|
|
9
|
|
|
17
|
|
|
8
|
|
Amortization
of prior service cost (income)
|
|
|
14
|
|
|
(196
|
)
|
|
12
|
|
|
(14
|
)
|
Net
periodic benefit cost (income)
|
|
$
|
128
|
|
$
|
(105
|
)
|
$
|
135
|
|
$
|
144
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
weighted-average assumptions used to determine net periodic benefit
cost
(income) are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount
rate
|
|
|
5.75
|
%
|
|
5.47
|
%
|
|
5.75
|
%
|
|
5.30
|
%
|
Expected
long-term return on plan assets
|
|
|
8.50
|
%
|
|
-
|
|
|
8.50
|
%
|
|
-
|
|
Rate
of compensation increase
|
|
|
4.00
|
%
|
|
2.00
|
%
|
|
4.00
|
%
|
|
2.00
|
%
|
No
cash
contributions are expected for the Kadant Web Systems’ noncontributory defined
benefit retirement plan. For the remaining pension and post-retirement welfare
benefit plans, no cash contributions, other than funding current benefit
payments, are expected in 2007.
13. Recent
Accounting Pronouncements
In
September 2006, the FASB issued SFAS No. 157 (SFAS 157), “Fair Value
Measurements.” SFAS 157 defines fair value, establishes a framework for
measuring fair
value
and expands disclosures about fair value measurements. SFAS 157 is effective
for
the Company in the first quarter of 2008. The Company is currently analyzing
the
effect that SFAS 157 will have on its consolidated financial statements.
In
February 2007, the FASB issued SFAS No. 159 (SFAS 159), “The Fair Value Option
for Financial Assets and Financial Liabilities - including an Amendment of
FASB
Statement No. 115.” SFAS 159 permits entities to measure eligible financial
assets, financial liabilities and certain other assets and liabilities at fair
value on an instrument-by-instrument basis. The fair value measurement election
is irrevocable once made and subsequent changes in fair value must be recorded
in earnings. The effect of adoption will be reported as a cumulative-effect
adjustment to beginning retained earnings in the first quarter of 2008. The
Company is currently analyzing the effect that SFAS 159 will have on its
consolidated financial statements.
Notes
to
Condensed Consolidated Financial Statements
(Unaudited)
14. Discontinued
Operation
On
October 21, 2005, our Kadant Composites LLC subsidiary (Kadant Composites
LLC) sold substantially all of its assets to LDI Composites Co. (the Buyer).
As
part of the sale transaction, Kadant Composites LLC retained the warranty
obligations associated with products manufactured prior to the sale date. All
activity related to this business is classified in the results of the
discontinued operation in the accompanying condensed consolidated financial
statements.
Operating
results for the discontinued operation included in the accompanying condensed
consolidated statement of income are as follows:
|
|
Three
Months Ended
|
|
|
|
March
31,
|
|
April
1,
|
|
(In
thousands)
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
Operating
Loss
|
|
$
|
(665
|
)
|
$
|
(292
|
)
|
Interest
Income
|
|
|
36
|
|
|
101
|
|
|
|
|
|
|
|
|
|
Loss
Before Income Tax Benefit (including $130 loss on disposal in
2006)
|
|
|
(629
|
)
|
|
(191
|
)
|
Benefit
for Income Taxes
|
|
|
237
|
|
|
77
|
|
|
|
|
|
|
|
|
|
Loss
From Discontinued Operation
|
|
$
|
(392
|
)
|
$
|
(114
|
)
|
In
the
first quarter of 2006, Kadant Composites LLC received $786,000 from the Buyer
for the settlement of post-closing adjustments resulting in a $130,000 loss
on
disposal.
The
major
classes of assets and liabilities of the discontinued operation included in
the
accompanying condensed consolidated balance sheet are as follows:
|
|
March
31,
|
|
December
30,
|
|
(In
thousands)
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
1,882
|
|
$
|
2,597
|
|
Restricted
cash
|
|
|
668
|
|
|
660
|
|
Other
accounts receivable
|
|
|
387
|
|
|
340
|
|
Current
deferred tax asset
|
|
|
454
|
|
|
454
|
|
Other
assets
|
|
|
403
|
|
|
410
|
|
|
|
|
|
|
|
|
|
Total
Assets
|
|
|
3,794
|
|
|
4,461
|
|
|
|
|
|
|
|
|
|
Accrued
warranty costs
|
|
|
1,180
|
|
|
1,135
|
|
Other
current liabilities
|
|
|
136
|
|
|
324
|
|
|
|
|
|
|
|
|
|
Total
Liabilities
|
|
|
1,316
|
|
|
1,459
|
|
|
|
|
|
|
|
|
|
Net
Assets
|
|
$
|
2,478
|
|
$
|
3,002
|
|
The
restricted cash of $668,000 as of March 31, 2007 represents the portion of
the
sale proceeds placed in escrow to satisfy certain indemnification obligations
and associated interest.
As
part
of the sale transaction, Composites LLC retained the warranty obligations
associated with products manufactured prior to the sale date. 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.
Notes
to
Condensed Consolidated Financial Statements
(Unaudited)
14. Discontinued
Operation (continued)
Prior
to
the sale of the composites business, Composites LLC recorded an estimate for
warranty-related costs at the time of sale based on its actual historical return
rates and repair costs, as well as other analytical tools for estimating future
warranty claims. These estimates were revised for variances between actual
and
expected claims rates. Composites LLC’s analysis of expected warranty claims
rates included detailed assumptions associated with potential product returns,
including the type of product sold, temperatures at the location of
installation, density of boards, and other factors. Certain assumptions, such
as
the effect of weather conditions and high temperatures on the product installed,
included inherent uncertainties that were subject to fluctuation. Through the
second quarter of 2006, Composites LLC continued to record an estimate for
warranty-related costs based on this methodology.
During
the third quarter of 2006, Composites LLC concluded that the highly subjective
nature of the assumptions noted above were not accurately predicting the actual
level of warranty claims making it no longer possible to calculate a reasonable
estimate of the future level of potential warranty claims. Accordingly, as
no
amount within the total range of loss represents a best estimate of the ultimate
loss to be recorded, Composites LLC is required under SFAS No. 5, “Accounting
for Contingencies” to record the minimum amount of the potential range of loss.
The warranty obligation as of March 31, 2007 represents the low end of the
estimated range of warranty reserve required based on the level of claims
processed to date. The total potential warranty cost ranges from $1,180,000
to
approximately $15,000,000. 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 records adjustments to the warranty
obligation to reflect the minimum amount of the potential range of loss.
A
summary
of the changes in accrued warranty costs in the first quarters of 2007 and
2006
is as follows:
|
|
Three
Months Ended
|
|
|
|
March
31,
|
|
April
1,
|
|
(In
thousands)
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
Balance
at Beginning of Period
|
|
$
|
1,135
|
|
$
|
5,276
|
|
Provision
|
|
|
556
|
|
|
-
|
|
Reimbursement
due from Buyer
|
|
|
110
|
|
|
-
|
|
Usage
|
|
|
(621
|
)
|
|
(1,487
|
)
|
|
|
|
|
|
|
|
|
Balance
at End of Period
|
|
$
|
1,180
|
|
$
|
3,789
|
|
The
reimbursement of $110,000 represents reimbursements owed from the Buyer to
Composites LLC for a portion of the claims paid as provided in the sales
agreement.
15. Subsequent
Events
Sale
of Subsidiary
On
April
30, 2007, the Company’s Kadant Johnson subsidiary sold substantially all of the
assets of its Casting Products business for $440,000, including $300,000 in
cash
and a $140,000 note receivable, resulting in a loss on sale of approximately
$350,000.
Amendment
to Credit Facility
On
May 9,
2007, the Company entered into a fourth amendment to its Credit Agreement to
amend the covenant that limits the payment of dividends and number of shares
the
Company can repurchase. The amendment eliminated one of the restrictions on
the
payment of dividends and repurchases of the Company’s common stock, which was
limited to $15 million plus 50% of net income earned after May 9, 2005. The
Company is still required to comply with a maximum consolidated leverage ratio
of 2.5 prior to the payment of any dividend or the making of any stock
repurchases. In addition, the amendment allows the Company to add its Kadant
Johnson Europe B.V. subsidiary as a foreign subsidiary borrower under the Credit
Agreement in the future.
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 also a manufacturer of granules made from papermaking byproducts.
Our continuing operations consist of one reportable operating segment, Pulp
and
Papermaking Systems (Papermaking Systems), and two separate product lines:
Fiber-based Products and Casting Products, included in Other Businesses. In
classifying operational entities into a particular segment, we considered how
our management assesses performance and makes operating decisions, and
aggregated businesses with similar economic characteristics, products and
services, production processes, customers, and methods of distribution. In
addition, prior to its sale on October 21, 2005, we operated a composite
building products business (the composites 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, paper machine accessory equipment, water-management systems,
and
fluid-handling systems and equipment 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;
|
|
-
|
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 including
cleaning, creping, web removal, and application of coatings; and
profiling
systems that control moisture, web curl, and gloss during paper
production;
|
|
-
|
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; and
|
|
-
|
|
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.
|
Overview
(continued)
Other
Businesses
Our
other
businesses include our Fiber-based Products business and our Casting Products
business.
Our
Fiber-based Products business 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.
Our
Casting Products business manufactures grey and ductile iron castings. This
business was sold on April 30, 2007.
Discontinued
Operation
On
October 21, 2005, our Kadant Composites LLC subsidiary (Composites LLC)
sold substantially all the assets comprising its composites business to LDI
Composites Co. (the Buyer). As part of the sale transaction, Composites LLC
retained the warranty obligations associated with products manufactured prior
to
the sale date.
Prior
to
the sale of the composites business, Composites LLC recorded an estimate for
warranty-related costs at the time of sale based on its actual historical return
rates and repair costs, as well as other analytical tools for estimating future
warranty claims. These estimates were revised for variances between actual
and
expected claims rates. Composites LLC’s analysis of expected warranty claims
rates included detailed assumptions associated with potential product returns,
including the type of product sold, temperatures at the location of
installation, density of boards, and other factors. Certain assumptions, such
as
the effect of weather conditions and high temperatures on the product installed,
included inherent uncertainties that were subject to fluctuation. Through the
second quarter of 2006, Composites LLC continued to record an estimate for
warranty-related costs based on this methodology.
During
the third quarter of 2006, Composites LLC concluded that the highly subjective
nature of the assumptions noted above were not accurately predicting the actual
level of warranty claims making it no longer possible to calculate a reasonable
estimate of the future level of potential warranty claims. Accordingly, as
no
amount within the total range of loss represents a best estimate of the ultimate
loss to be recorded, Composites LLC is required under SFAS No. 5, “Accounting
for Contingencies” to record the minimum amount of the potential range of loss.
As of March 31, 2007, the accrued warranty reserve associated with the
composites business was $1.2 million, which represents the low end of the range
of potential loss for products under warranty. Composites LLC has calculated
the
potential range of loss to be between $1.2 million and approximately $15.0
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 records adjustments to the warranty obligation to
reflect the minimum amount of the potential range of loss.
All
future activity associated with this warranty reserve will continue to be
classified in the results of the discontinued operation in our condensed
consolidated financial statements.
International
Sales
During
the first quarters of 2007 and 2006, approximately 61% and 57%, respectively,
of
our sales were to customers outside the United States, principally in China
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.
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
Overview
(continued)
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 Item 7 of our Annual Report on Form 10-K
for the fiscal year ended December 30, 2006, filed with the Securities and
Exchange Commission (SEC). There have been no material changes to these critical
accounting policies since fiscal year-end 2006 that warrant further disclosure,
except for the adoption of Financial Accounting Standards Board (FASB)
Interpretation No. 48 (FIN 48), “Accounting for Uncertainty in Income Taxes - An
Interpretation of FASB Statement No. 109.”
Adoption
of FIN 48
-
Effective
December 31, 2006, we adopted FIN 48. FIN 48 provides guidance for the
recognition threshold and measurement attribute for financial statement
recognition and measurement of a tax position taken or expected to be taken
in a
tax return. In accordance with FIN 48 we recognized a cumulative-effect
adjustment of $0.7 million increasing our liability for unrecognized tax
benefits to $3.4 million and reducing the December 31, 2006 balance of retained
earnings.
In
the
ordinary course of business there is inherent uncertainty in quantifying
our
income tax positions. We assess our income tax positions and record tax benefits
for all years subject to examination based upon management’s evaluation of the
facts, circumstances, and information available at the reporting date. For
those
tax positions where it is more likely than not that a tax benefit will be
sustained, we have recorded the largest amount of tax benefit with a greater
than 50 percent likelihood of being realized upon ultimate settlement with
a
taxing authority that has full knowledge of all relevant information. For
those
income tax positions where it is not more likely than not that a tax benefit
will be sustained, no tax benefit has been recognized in the financial
statements. Where applicable, the associated interest and penalties have
also
been recognized.
Industry
and Business Outlook
Our
products are primarily sold to the global pulp and paper industry. The paper
industry in North America and Europe has been in a prolonged down cycle for
the
past several years and has undergone important structural changes during that
time. In contrast, the paper industry in China has experienced strong growth
over the last several years. The performance of paper producers in North America
and Europe has been generally improving over the past year. However, paper
producers in those regions continue to be negatively affected by higher
operating costs, especially higher energy and chemical costs. We believe paper
companies are still cautious about increasing their capital and operating
spending in the current market environment. As the financial performance of
paper companies has improved, they have increased their capital and operating
spending, which has had a positive effect on paper company suppliers, such
as
our Company. We continue to concentrate our efforts on several initiatives
intended to improve our operating results, including: (i) increasing our
use of low-cost manufacturing bases in China and Mexico, (ii) increasing
sales of paper machine accessories and water-management products in China,
(iii) penetrating new markets outside the paper industry, and
(iv) increasing aftermarket sales in China. In addition, we continue to
focus our efforts on managing our operating costs, capital expenditures, and
working capital.
In
the
last several years, China has become a significant market for our
stock-preparation equipment. A large percentage of the world’s increases in
paper production capacity are in China. Consequently, competition is intense
and
there is increasing pricing pressure, particularly for large systems. To
capitalize on this growing market, we plan to start manufacturing certain of
our
accessory and water-management products in our China facilities in 2007.
Currently, our stock-preparation revenues from China are primarily derived
from
large capital orders, the timing of which is often difficult to predict. At
times, our customers in China have experienced delays in obtaining financing
for
their capital addition and expansion projects due to efforts by the Chinese
government to control economic growth, which are generally reflected in a
slowdown in financing approvals in China’s banking system. These delays in
receiving financing could delay our recognizing revenue on these projects to
periods later than originally anticipated. We plan to use Kadant Jining as
a
base for increasing our aftermarket business, which we believe will be more
predictable.
Overview
(continued)
Our
2007
guidance reflects expected revenues and earnings per share from continuing
operations, which exclude the results from our discontinued operation. For
the
second quarter of 2007, we expect to earn between $.36
and
$.38 per diluted share (including an estimated loss of $.01 per diluted share
on
the sale of our Casting Products business), on revenues of $84 to $86 million.
For the full year, including the $.01 loss per diluted share on the sale of
the
Casting Products business, we expect to earn between $1.49 and $1.59 per diluted
share, on revenues of $360 to $370 million.
Results
of Operations
First
Quarter 2007 Compared With First Quarter 2006
The
following table sets forth our unaudited condensed consolidated statement of
income expressed as a percentage of total revenues from continuing operations
for the first fiscal quarters of 2007 and 2006. The results of operations for
the fiscal quarter ended March 31, 2007 are not necessarily indicative of the
results to be expected for the full fiscal year.
|
|
Three
Months Ended
|
|
|
|
March
31,
|
|
April
1,
|
|
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
Revenues
|
|
|
100
|
%
|
|
100
|
%
|
|
|
|
|
|
|
|
|
Costs
and Operating Expenses:
|
|
|
|
|
|
|
|
Cost
of revenues
|
|
|
63
|
|
|
62
|
|
Selling,
general, and administrative expenses
|
|
|
27
|
|
|
29
|
|
Research
and development expenses
|
|
|
2
|
|
|
2
|
|
Restructuring
costs
|
|
|
-
|
|
|
1
|
|
|
|
|
92
|
|
|
94
|
|
|
|
|
|
|
|
|
|
Operating
Income
|
|
|
8
|
|
|
6
|
|
|
|
|
|
|
|
|
|
Interest
Income
|
|
|
1
|
|
|
1
|
|
Interest
Expense
|
|
|
(1
|
)
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
Income
from Continuing Operations Before Provision for Income
Taxes
|
|
|
8
|
|
|
6
|
|
Provision
for Income Taxes
|
|
|
(3
|
)
|
|
(2
|
)
|
|
|
|
|
|
|
|
|
Income
from Continuing Operations
|
|
|
5
|
|
|
4
|
|
Loss
from Discontinued Operation
|
|
|
-
|
|
|
-
|
|
Net
Income
|
|
|
5
|
%
|
|
4
|
%
|
Revenues
Revenues
increased to $88.2 million in the first quarter of 2007 from $75.6 million
in
the first quarter of 2006, an increase of $12.6 million, or 17%. Revenues in
the
first quarter of 2007 include a $2.8 million, or 4%, increase from Kadant Jining
acquired in June 2006 and a $2.4 million, or 3%, increase from the favorable
effects of currency translation.
Results
of Operations (continued)
Revenues
for the first quarters of 2007 and 2006 from our Papermaking Systems segment
and
our other businesses are as follows:
|
|
Three
Months Ended
|
|
|
|
March
31,
|
|
April
1,
|
|
(In
thousands)
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
Papermaking
Systems
|
|
$
|
84,034
|
|
$
|
71,073
|
|
Other
Businesses
|
|
|
4,207
|
|
|
4,518
|
|
|
|
$
|
88,241
|
|
$
|
75,591
|
|
Papermaking
Systems Segment.
Revenues at the Papermaking Systems segment increased to $84.0 million in the
first quarter of 2007 from $71.1 million in the first quarter of 2006, an
increase of $12.9 million, or 18%. Revenues in 2007 include a $2.8 million,
or
4%, increase from Kadant Jining acquired in June 2006, and a $2.4 million,
or
3%, increase from the favorable effects of currency translation.
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
2007
and 2006, and the changes in revenues by product line between the first quarters
of 2007 and 2006, 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 management measures and forecasts
the
Company’s performance, especially when comparing such results to prior periods.
|
|
Three
Months Ended
|
|
Increase
(Decrease)
Excluding
Effect
of
|
|
(In
millions)
|
|
March
31,
2007
|
|
April
1,
2006
|
|
Increase
(Decrease)
|
|
Currency
Translation
|
|
|
|
|
|
|
|
|
|
|
|
Product
Line:
|
|
|
|
|
|
|
|
|
|
Stock-Preparation
Equipment
|
|
$
|
39.9
|
|
$
|
30.8
|
|
$
|
9.1
|
|
$
|
8.2
|
|
Fluid-Handling
|
|
|
20.1
|
|
|
19.0
|
|
|
1.1
|
|
|
0.3
|
|
Accessories
|
|
|
15.5
|
|
|
14.1
|
|
|
1.4
|
|
|
0.8
|
|
Water-Management
|
|
|
7.9
|
|
|
6.5
|
|
|
1.4
|
|
|
1.3
|
|
Other
|
|
|
0.6
|
|
|
0.7
|
|
|
(0.1
|
)
|
|
(0.1
|
)
|
|
|
$
|
84.0
|
|
$
|
71.1
|
|
$
|
12.9
|
|
$
|
10.5
|
|
Revenues
from the segment’s stock-preparation equipment product line increased $9.1
million, or 29%, in the first quarter of 2007 compared to the first quarter
of
2006, including a $0.9 million increase from the favorable effect of currency
translation. The increase was primarily due to a $4.8 million, or 53%, increase
in capital equipment sales in China, which includes a $2.8 million increase
from
Kadant Jining acquired in June 2006. In addition, revenues in this product
line
also increased $3.5 million, or 28%, from sales in North America, primarily
due
to stronger sales of both capital and aftermarket products.
Revenues
from the segment’s fluid-handling product line increased $1.1 million, or 6%, in
the first quarter of 2007 compared to the first quarter of 2006, including
a
$0.8 million increase from the favorable effect of currency translation.
Excluding the effect of currency translation, revenues from the segment’s
fluid-handling product line increased $0.3 million, or 2%, primarily due to
stronger demand for our products in China, Europe and Latin America, offset
largely by a decrease in sales in Canada and the U.S.
Revenues
from the segment’s accessories product line increased $1.4 million, or 10%, in
the first quarter of 2007 compared to the first quarter of 2006, including
a
$0.6 million increase from the favorable effect of currency translation.
Excluding the effect
Results
of Operations (continued)
of
currency translation, revenues from the segment’s accessories product line
increased $0.8 million, or 6%, primarily due to an increase in sales in North
America due to stronger demand, offset in part by weaker demand in Europe.
Revenues
from the segment’s water-management product line increased $1.4
million, or 23%, in the first quarter of 2007 compared to the first quarter
of
2006 due primarily to an increase in capital sales in Europe.
Other
Businesses. Revenues
from the Fiber-based Products business decreased $0.6 million, or 16%, to $3.0
million in the first quarter of 2007 from $3.6 million in the first quarter
of
2006 due to weaker sales of Biodac™,
our
line of biodegradable granular products, due to increased competition. Revenues
from our Casting Products business increased $0.3 million, or 27%, to $1.2
million in the first quarter of 2007 from $0.9 million in the first quarter
of
2006.
Gross
Profit Margin
Gross
profit margins for the first quarters of 2007 and 2006 are as
follows:
|
|
Three
Months Ended
|
|
|
|
March
31,
|
|
April
1,
|
|
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
Gross
Profit Margin:
|
|
|
|
|
|
Pulp
and Papermaking Systems
|
|
|
37
|
%
|
|
38
|
%
|
Other
|
|
|
34
|
|
|
29
|
|
|
|
|
37
|
%
|
|
38
|
%
|
Gross
profit margin was 37%
and
38% in the first quarters of 2007 and 2006, respectively. The gross profit
margin at the Papermaking Systems segment decreased to 37% in the first quarter
of 2007 from 38% in the first quarter of 2006. This decrease was primarily
due
to an unfavorable product mix, which shifted toward lower-margin capital
products and to lower margins at our stock-preparation equipment product line,
especially in China. Partially offsetting these decreases were improved gross
profit margins at our fluid-handling product line. The gross profit margin
at
our other businesses increased to 34% in the first quarter of 2007 from 29%
in
the first quarter of 2006. This increase was due primarily to a higher gross
profit margin at our Fiber-based Products business due to the lower cost of
natural gas.
Operating
Expenses
Selling,
general, and administrative expenses as a percentage of revenues were 27% and
29% in the first quarters of 2007 and 2006, respectively. Selling, general,
and
administrative expenses increased $1.4 million, or 6%, to $23.5 million in
the
first quarter of 2007 from $22.1 million in the first quarter of 2006. This
increase included a $0.7 million increase from the unfavorable effect of foreign
currency translation and a $0.5 million increase in selling, general, and
administrative expenses from Kadant Jining acquired in June 2006.
Research
and development expenses increased $0.2 million to $1.7 million in the first
quarter of 2007 compared to $1.5 million in the first quarter of 2006 and
represented 2% of revenues in both periods.
Interest
Income
Interest
income increased to $0.4 million in the first quarter of 2007 compared to $0.3
million in the first quarter of 2006 due primarily to higher prevailing interest
rates.
Interest
Expense
Interest
expense was $0.8 million in both the first quarters of 2007 and 2006.
Results
of Operations (continued)
Provision
for Income Taxes
Our
effective tax rate was 32% and 34% in the first quarters of 2007 and 2006,
respectively. The 2% decrease in our effective tax rate is primarily due to
a
greater portion of our operating profits occurring in lower tax jurisdictions
in
2007 compared to 2006.
Income
from Continuing Operations
Income
from continuing operations increased to $4.7 million in the first quarter of
2007 from $2.8 million in the first quarter of 2006, an increase of $1.9
million, or 70%. The increase in the 2007 period was primarily due to an
increase in operating income of $2.6 million (see Revenues
and
Gross Profit Margin discussed
above), offset in part by an increase of $0.7 million in the provision of income
taxes.
Loss
from Discontinued Operation
Loss
from
discontinued operation increased to $0.4 million in the first quarter of 2007
from $0.1 million in the first quarter of 2006 due primarily to a $0.6 million
pre-tax increase in warranty costs.
Recent
Accounting Pronouncements
In
September 2006, the FASB issued SFAS No. 157 (SFAS 157), “Fair Value
Measurements.” SFAS 157 defines fair value, establishes a framework for
measuring fair value and expands disclosures about fair value measurements.
SFAS
157 is effective for us in the first quarter of 2008. We are currently analyzing
the effect that SFAS 157 will have on our consolidated financial statements.
In
February 2007, the FASB issued SFAS No. 159 (SFAS 159), “The Fair Value Option
for Financial Assets and Financial Liabilities - including an Amendment of
FASB
Statement No. 115.” SFAS 159 permits entities to measure eligible financial
assets, financial liabilities and certain other assets and liabilities at fair
value on an instrument-by-instrument basis. The fair value measurement election
is irrevocable once made and subsequent changes in fair value must be recorded
in earnings. The effect of adoption will be reported as a cumulative-effect
adjustment to beginning retained earnings in the first quarter of 2008. We
are
currently analyzing the effect that SFAS 159 will have on our consolidated
financial statements.
Liquidity
and Capital Resources
Consolidated
working capital, including the discontinued operation, was $77.5 million at
March 31, 2007, compared with $80.5 million at December 30, 2006. Included
in
working capital are cash and cash equivalents of $41.2 million at March 31,
2007, compared with $39.6 million at December 30, 2006. At March 31, 2007,
$34.4
million of cash and cash equivalents were held by our foreign
subsidiaries.
First
Quarter 2007
Our
operating activities provided cash of $5.9
million in the first quarter of 2007, including $6.5 million provided by our
continuing operations and $0.6 million used by the discontinued operation.
The
cash provided by our continuing operations in the first quarter of 2007 was
primarily due to income from continuing operations of $4.7 million, an increase
in accounts payable of $3.4 million, a decrease in unbilled costs and fees
of
$3.2 million, and a non-cash charge of $1.8 million for depreciation and
amortization expense. These sources of cash in the first quarter of 2007 were
offset in part by a decrease in other current liabilities of $6.3 million and
an
increase in other current assets of $1.1 million. The decrease in other current
liabilities of $6.3 million was primarily due to a decrease of $4.0 million
in
accrued payroll and employee benefits primarily related to incentive payments
made in the first quarter of 2007.
Our
investing activities used cash of $0.6 million in the first quarter of 2007
related primarily to our continuing operations, which used cash of $0.8 million
to purchase property, plant, and equipment.
Liquidity
and Capital Resources (continued)
Our
financing activities used cash of $4.4 million in the first quarter of 2007
related entirely to our continuing operations. We used cash of $3.8 million
in
the first quarter of 2007 to repurchase our common stock on the open market,
and
we used $1.9 million for principal payments on our term loan. We received $1.0
million of proceeds from the issuance of common stock in connection with the
exercise of employee stock options.
First
Quarter 2006
Our
operating activities provided cash of $1.7 million in the first quarter of
2006
related primarily to our continuing operations. The cash provided by operating
activities in the first quarter of 2006 was primarily the result of $2.8 million
of income from continuing operations, an increase in accounts payable of $8.7
million, and a non-cash charge of $1.9 million for depreciation and amortization
expense. These sources of cash in the first quarter of 2006 were offset in
part
by a decrease in other current liabilities of $8.3 million, an increase in
unbilled costs and fees of $1.6 million, and an increase in accounts receivable
of $1.5 million. The decrease in other current liabilities of $8.3 million
was
primarily related to a decrease of $3.8 million in billings in excess of
contract costs and fees due to the timing of contracts recognized under the
percentage-of-completion method, a decrease of $2.7 million in accrued
restructuring costs due to payments made in the first quarter of 2006, and
a
decrease of $1.9 million in accrued payroll and employee benefits primarily
due
to incentive payments made in the first quarter of 2006.
Our
investing activities provided cash of $0.3 million in the first quarter of
2006,
including $0.5 million used by continuing operations and $0.8 million provided
by the discontinued operation. We used $0.4 million in our continuing operations
to purchase property, plant, and equipment and we incurred $0.3 million in
acquisition-related costs. The cash provided by the discontinued
operation of $0.8 million relates primarily to the cash proceeds received in
the
first quarter of 2006 from the Buyer of the assets of Kadant Composites LLC
for
post-closing adjustments.
Our
financing activities used cash of $1.6 million in the first quarter of 2006
related entirely to our continuing operations. The use of cash in the first
quarter of 2006 relates primarily to the principal payment made on our term
loan
of $2.3 million, offset in part by $0.5 million of proceeds we received from
the
issuance of common stock in connection with the exercise of employee stock
options.
Additional
Liquidity and Capital Resources
We
completed our acquisition of Kadant Johnson on May 11, 2005 for
approximately $114.0 million, of which $101.5 million was paid in cash at
closing, $1.6 million was paid in the fourth quarter of 2006 in settlement
of
post-closing adjustments, $4.8 million was paid for acquisition-related costs,
and $6.1 million we expect to pay in annual installments through 2010 related
to
certain tax assets of Kadant Johnson, the value of which we expect to realize.
In 2006, we paid $0.9 million of this additional consideration. The remaining
balance, of which $0.9 million is included in other current liabilities and
$4.3
million is included in other long-term liabilities in the accompanying condensed
consolidated balance sheet, is due over the next four years as follows: $0.9
million in each of 2007, 2008 and 2009, and $2.5 million in 2010. To fund $60
million of the purchase price, we entered into a term loan and revolving credit
facility (Credit Agreement) effective as of May 9, 2005, as subsequently
amended, in the aggregate principal amount of up to $95 million, including
a $35
million revolver. The Credit Agreement includes a $60 million term loan (Term
Loan), which is repayable in quarterly installments over a five-year period.
The
current remaining aggregate principal amount to be repaid each year is as
follows: $6.9 million, $11.4 million, $12.6 million and $6.3 million in 2007,
2008, 2009, and 2010, respectively.
The
amount we are able to borrow under the revolving line of credit is the total
borrowing capacity less any outstanding letters of credit and multi-currency
borrowings issued under the Credit Agreement. As of March 31, 2007, there were
no outstanding borrowings under the revolving line of credit and we had $13.7
million of borrowing capacity.
Our
obligations under the Credit Agreement may be accelerated upon the occurrence
of
an event of default under the Credit Agreement, which include 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 ERISA, uninsured judgments and the failure
to pay certain indebtedness, and a change-of-control default.
Liquidity
and Capital Resources (continued)
In
addition, the 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 3.0, which is lowered to 2.5 in certain
circumstances, including when we make a material acquisition, pay dividends,
or
repurchase our stock. We are also required to comply with a minimum consolidated
fixed charge coverage ratio of 1.5. In addition to the financial covenants,
we
are also required to comply with covenants related to 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, negative pledges, arrangements affecting subsidiary
distributions, and entering into new lines of business. As of March 31, 2007,
we
were in compliance with these covenants.
The
loans
under the Credit Agreement are guaranteed by certain of our domestic
subsidiaries and secured by a pledge of 65% of the stock of our first-tier
foreign subsidiaries and our subsidiary guarantors pursuant to a guarantee
and
pledge agreement effective May 9, 2005 in favor of JPMorgan Chase Bank,
N.A., as agent on behalf of the lenders.
We
entered into swap agreements in 2005 and 2006 to convert a portion of our
outstanding debt from floating to fixed rates of interest. As of March 31,
2007,
$36.3 million, or 70%, of our outstanding debt was hedged through interest
rate
swap agreements. The swap agreements have the same terms and quarterly payment
dates as the corresponding debt and reduce proportionately in line with the
amortization of the debt.
On
June 2, 2006, our Kadant Jining subsidiary assumed responsibility for the
operation of Jining
Huayi Light Industry Machinery Co., Ltd. (Huayi), and, by September 30,
2006, acquired the assets of Huayi including cash, inventory, machinery,
equipment, and buildings for approximately $21.1 million, net of assumed
liabilities of $2.3 million. Of the total consideration, $17.7 million was
paid
in cash. To finance a portion of the acquisition, on June 6, 2006, Kadant
Jining borrowed 40 million Chinese renminbi, or $5.1 million, under a
47-month interest-only loan with Bank of China Limited. Interest on this loan
accrues and is payable quarterly in arrears based on the interest rate published
by Bank of China Limited for a loan of the same term less 10%. We plan to
finance the remaining purchase obligation of $3.4 million, which we expect
to
pay through January 2008 as certain obligations are satisfied, through a
combination of cash and borrowings in China.
On
May 3, 2006, our board of directors authorized the repurchase of up to
$15.0 million of our equity securities during the period from May 18, 2006
through May 18, 2007. As of March 31, 2007, we had purchased 508,500 shares
for $12.4 million under this authorization. On May 2, 2007, our board of
directors approved the repurchase by us of up to $20 million of our equity
securities during the period from May 2, 2007 through May 2, 2008. Repurchases
under these authorizations 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 March 31, 2007, we have not provided
for U.S. income taxes on approximately $64.4 million of unremitted foreign
earnings. We believe that any U.S. tax liability due upon remittance of such
earnings would be immaterial due to the availability of U.S. foreign tax credits
generated from such remittance. The related foreign tax withholding, which
would
be required if we remitted the foreign earnings to the U.S., would be
approximately $2.5 million.
On
October 21, 2005, Composites LLC sold its composites business, presented as
a discontinued operation in the accompanying condensed
consolidated financial statements. As part of the transaction, Composites LLC
retained the warranty obligation associated with products manufactured prior
to
the sale date. At March 31, 2007, the warranty reserve for the composites
business was $1.2 million. Our liquidity and consolidated results will continue
to be impacted by future cash payments for warranty claims and any adjustments
to this warranty obligation. Adjustments to our results for these items will
continue to be classified within the results for the discontinued operation
in
our condensed consolidated financial statements.
Although
we currently have no material commitments for capital expenditures, we plan
to
make expenditures of approximately $6 million during the remainder of 2007
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 the remaining purchase obligation
for the Kadant Jining acquisition, 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 Agreement,
Liquidity
and Capital Resources (continued)
cash
proceeds from additional borrowings we anticipate entering into in China to
complete the Kadant Jining acquisition, 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 2006
as
disclosed in Item 7A of our Annual Report on Form 10-K for the fiscal year
ended
December 30, 2006 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 March 31, 2007. 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 March 31, 2007,
our
Chief Executive Officer and Chief Financial Officer concluded that as of March
31, 2007, 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 March 31, 2007 that has
materially affected, or is reasonably likely to materially affect, our internal
control over financial reporting.
PART
II - OTHER INFORMATION
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 2007
and
beyond to differ materially from those expressed in any forward-looking
statements made by us, or on our behalf.
Our
business is dependent on the condition of the pulp and paper industry.
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 general economy, as well as to a number
of
other factors, including pulp and paper production capacity relative to demand.
In recent years, the paper industry in certain geographic regions, notably
Europe and North America, has undergone a number of structural changes,
including decreased spending, mill closures, consolidations, and bankruptcies,
all of which have adversely affected our business. In addition, paper producers
have been and continue to be negatively affected by higher operating costs,
especially higher energy and chemical costs. We believe paper companies are
still cautious about increasing their capital and operating spending in the
current market environment. As paper companies consolidate in response to market
weakness, they frequently reduce capacity and postpone or even cancel capacity
addition or expansion projects. These actions can adversely affect our revenue
and profitability globally or in a particular region or product line.
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.
In
2006,
we experienced a significant increase in revenues from China and acquired
another manufacturing facility in Jining, China. Through our acquisition of
Kadant Johnson in May 2005, we also have a manufacturing operation in Wuxi,
China. We plan to begin manufacturing accessory and water management products
in
China for the Chinese market in 2007. During the first quarter of 2007 and
2006,
approximately $16.5 million, or 19%, and $10.8 million, or 14%, respectively,
of
our revenues were to customers in China. Our manufacturing facilities in China,
as well as the significant level of revenues from China, expose us to increased
risk in the event of changes in the policies of the Chinese government,
political unrest, unstable economic conditions, or other developments in China
or in U.S.-China relations that are adverse to trade, including enactment of
protectionist legislation or trade 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 the down payments for such contracts
are received. 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 prior to the receipt of a letter
of credit covering the remaining balance of the contract.
Our
business is subject to economic, currency, political, and other risks associated
with international sales and operations.
During
the first quarters of 2007 and 2006, approximately 61% and 57%, respectively,
of
our sales were to customers outside the United States, principally in China
and
Europe. In addition, we operate several manufacturing operations worldwide,
including in China, Mexico, and Brazil. International revenues and operations
are subject to a number of risks, including the
following:
-
|
agreements
may be difficult to enforce and receivables difficult to collect
through a
foreign country’s legal system,
|
-
|
foreign
customers may have longer payment cycles,
|
-
|
foreign
countries may impose additional withholding taxes or otherwise
tax our
foreign income, impose tariffs, or adopt other
restrictions on foreign trade,
|
-
|
it
may be difficult to repatriate funds, due to unfavorable tax consequences
or other restrictions or limitations imposed by foreign governments,
and
|
-
|
the
protection of intellectual property in foreign countries may be
more
difficult to enforce.
|
Although
we seek to charge our customers in the same currency in which our operating
costs are incurred, fluctuations in currency exchange rates may affect product
demand and adversely affect the profitability in U.S. dollars of products we
provide in international markets where payment for our products and services
is
made in their local currencies. 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.
We
are subject to intense competition in all our markets.
We
believe that the principal competitive factors affecting the markets for our
products include quality, price, service, technical expertise, and product
innovation. Our competitors include a number of large multinational corporations
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.
Our
debt may adversely affect our cash flow and may restrict our investment
opportunities.
In
2005,
we entered into a Credit Agreement, as subsequently amended, consisting of
a $60
million five-year term loan and a $35 million revolver and borrowed $60 million
to fund the acquisition of Kadant Johnson under the term loan. We have also
borrowed additional amounts to fund other acquisitions and grow our business,
and 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
leverage could have negative consequences, including:
-
|
increasing
our vulnerability to adverse economic and industry conditions,
|
-
|
limiting
our ability to obtain additional financing,
|
-
|
limiting
our ability to pay dividends on or to repurchase our capital stock,
|
-
|
limiting
our ability to acquire new products and technologies through acquisitions
or licensing agreements, and
|
-
|
limiting
our flexibility in planning for, or reacting to, changes in our
business
and the industries in which we compete.
|
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, $36.3
million, or 70%, of our outstanding floating rate debt as of March 31, 2007
was
hedged through interest rate swap agreements.
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.
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 Credit Agreement may limit our activities.
Our
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:
-
|
incur
additional indebtedness,
|
-
|
pay
dividends on, redeem, or repurchase our capital stock,
|
-
|
enter
into transactions with affiliates, and
|
-
|
consolidate,
merge, or transfer all or substantially all of our assets and the
assets
of our subsidiaries.
|
We
are
also required to meet specified financial ratios under the terms of our 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 foreign 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 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 occurs, we may not have sufficient funds available to make
the
required payments 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.
Future
warranty claims associated with the discontinued operation may exceed the
warranty reserve and the assets of the discontinued operation.
On
October 21, 2005, Composites LLC sold its composites business, but retained
the warranty obligation associated with products manufactured prior to the
sale
date. All future activity associated with this warranty obligation is classified
in the results of the discontinued operation in our condensed consolidated
financial statements. The discontinued operation has experienced significant
liabilities associated with warranty claims related to its composite decking
products manufactured prior to the sale date. Our consolidated results will
continue to be impacted by these warranty obligations and the claims may exceed
the assets of the discontinued operation. The assets and liabilities of the
discontinued operation are held in our Composites LLC subsidiary.
During
the third quarter of 2006, Composites LLC concluded that the highly subjective
nature of the assumptions used in estimating the warranty obligation were not
accurately predicting the actual level of warranty claims making it no longer
possible to calculate a reasonable estimate of the future level of potential
warranty claims. Accordingly, as no amount within the total range of loss
represents a best estimate of the ultimate loss to be recorded, we are required
under Statement of Financial Accounting Standards (SFAS) No. 5, “Accounting
for Contingencies” to record the minimum amount of the potential range of loss
as the warranty obligation in our consolidated results. The warranty obligation
as of March 31, 2007 represents the low end of the estimated range of warranty
reserve required based on the level of claims processed to date. The total
potential warranty cost ranges from $1.2 million to approximately $15.0 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. Going
forward, adjustments to the warranty obligation will be recorded to reflect
the
minimum amount of the potential range of loss for products under warranty 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.
|
We
may be required to reorganize our operations in response to changing conditions
in the paper industry, and such actions may require significant expenditures
and
may not be successful.
In
the
past few years, we have undertaken various restructuring measures in response
to
changing market conditions in the paper industry. For example, in 2004 we
incurred costs of approximately $9.2 million in connection with the
restructuring of our subsidiary in France. 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 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 financial 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 in the production of our fiber-based granular products, the price
of
which is subject to fluctuation. 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. Although
the
cost of natural gas has fallen recently, we may not realize the benefit of
lower
prices due to the short-term forward contracts we have entered into. 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 two paper mills for the fiber used in the manufacture of our
fiber-based granular products. These mills have the exclusive right to supply
the papermaking byproducts used in the manufacturing process. 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 relationship with the mills is good, the mills could decide not to renew
the
contract when it expires at the end of 2007, or may not agree to renew 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.
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 economies such as China, where the laws,
courts, and administrative agencies may not protect our intellectual property
rights as fully as in other countries.
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.
Fluctuations
in our quarterly operating results may cause our stock price to decline.
Given
the
nature of the markets in which we participate and the effect of Staff Accounting
Bulletin (SAB) No. 104, “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 quarterly
operating results include:
-
|
failure
of our products to pass contractually agreed upon acceptance tests,
which
would delay or prohibit recognition of revenues under SAB No. 104,
|
-
|
changes
in the assumptions used in recognizing revenue under the
percentage-of-completion method of
accounting,
|
-
|
failure
of a customer, particularly in China, to comply with an order’s
contractual obligations,
|
-
|
adverse
changes in demand for and market acceptance of our products,
|
-
|
competitive
pressures resulting in lower sales prices of our products,
|
-
|
adverse
changes in the pulp and paper industry,
|
-
|
delays
or problems in our introduction of new products,
|
-
|
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, and
|
- |
fluctuations
in our effective tax rate. |
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 2007:
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 (2)
|
|
Approximate
Dollar Value of Shares that May Yet Be
Purchased
Under
the Plans
|
|
12/30/06
- 1/31/07
|
|
|
-
|
|
|
-
|
|
|
-
|
|
$
|
7,818,695
|
|
2/1/07
- 2/28/07
|
|
|
-
|
|
|
-
|
|
|
-
|
|
$
|
7,818,695
|
|
3/1/07
- 3/31/07
|
|
|
205,700
|
|
$
|
25.21
|
|
|
205,700
|
|
$
|
2,633,980
|
|
Total:
|
|
|
205,700
|
|
$
|
25.21
|
|
|
205,700
|
|
|
|
|
(1)
|
On
May 3, 2006, our board of directors approved the repurchase by us
of up to
$15 million of our equity securities during the period from May 18,
2006
through May 18, 2007. Repurchases may be made in public or private
transactions, including under Securities Exchange Act Rule 10b-5-1
trading
plans. As of March 31, 2007, we had repurchased 135,300 shares of
our
common stock for $3.1 million in the third quarter of 2006, 167,500
shares
of our common stock for $4.1 million in the fourth quarter of 2006,
and
205,700 shares of our common stock for $5.2 million in the first
quarter
of 2007 under this authorization.
|
(2)
|
On
May 2, 2007, our board of directors approved the repurchase by us
of up to
$20 million of our equity securities during the period from May 2,
2007
through May 2, 2008. Repurchases may be made in public or private
transactions, including under Securities Exchange Act Rule 10b-5-1
trading
plans.
|
Item
5
- Other Information
On
May 9,
2007, we entered into a fourth amendment to our Credit Agreement to amend
the
covenant that limits the payment of dividends and number of shares we can
repurchase. The amendment eliminated one of the restrictions on the payment
of
dividends and repurchases of our common stock, which was limited to $15 million
plus 50% of net income earned after May 9, 2005. We are still required to
comply
with a maximum consolidated leverage ratio of 2.5 prior to the payment of
any
dividend or the making of any stock repurchases. In addition, the amendment
allows us to add our Kadant Johnson Europe B.V. subsidiary as a foreign
subsidiary borrower under the Credit Agreement in the
future.
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 9th day of May, 2007.
|
KADANT
INC.
|
|
|
|
/s/
Thomas M. O’Brien
|
|
Thomas
M. O’Brien
|
|
Executive
Vice President and Chief Financial Officer
|
|
(Principal
Financial Officer)
|
EXHIBIT
INDEX
Exhibit
|
|
|
Number
|
|
Description
of Exhibit
|
|
|
|
10.1
|
|
Fourth
Amendment dated May 9, 2007 to the Credit Agreement dated May 9,
2005 (as
amended to date) among the Registrant, the Foreign Subsidiary Borrowers
from time to time parties thereto, the several lenders from time
to time
parties thereto, and JPMorgan Chase Bank, N.A., as Administrative
Agent.
|
|
|
|
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.
|
|
|
|
|
|
|
|
|
|
|
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