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 October 2, 2010
|
|
¨
|
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|
|
|
For the transition period from ________ to _________
|
Commission file number 1-11406
KADANT INC.
(Exact name of registrant as specified in its charter)
|
Delaware
|
|
52-1762325
|
|
(State or Other Jurisdiction of Incorporation or Organization)
|
|
(I.R.S. Employer Identification No.)
|
| |
|
|
|
One Technology Park Drive
|
|
|
|
Westford, Massachusetts
|
|
01886
|
|
(Address of Principal Executive Offices)
|
|
(Zip Code)
|
Registrant’s telephone number, including area code: (978) 776-2000
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ¨ No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
|
Large accelerated filer o
|
Accelerated Filer x
|
|
Non-accelerated filer o (Do not check if a smaller reporting company)
|
Smaller reporting company o
|
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
| |
|
|
|
| |
|
|
Outstanding at October 29, 2010
|
|
| |
Common Stock, $.01 par value
|
|
12,185,551
|
|
PART I – FINANCIAL INFORMATION
Item 1 – Financial Statements
KADANT INC.
Condensed Consolidated Balance Sheet
(Unaudited)
Assets
| |
|
October 2,
|
|
|
January 2,
|
|
|
(In thousands)
|
|
2010
|
|
|
2010
|
|
| |
|
|
|
|
|
|
|
Current Assets:
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$ |
49,487 |
|
|
$ |
45,675 |
|
|
Accounts receivable, less allowances of $2,494 and $2,493
|
|
|
43,550 |
|
|
|
36,436 |
|
|
Inventories (Note 5)
|
|
|
42,769 |
|
|
|
37,435 |
|
|
Other current assets
|
|
|
11,229 |
|
|
|
11,229 |
|
|
Assets of discontinued operation
|
|
|
475 |
|
|
|
496 |
|
|
Total Current Assets
|
|
|
147,510 |
|
|
|
131,271 |
|
| |
|
|
|
|
|
|
|
|
|
Property, Plant, and Equipment, at Cost
|
|
|
99,306 |
|
|
|
100,700 |
|
|
Less: accumulated depreciation and amortization
|
|
|
62,510 |
|
|
|
62,285 |
|
| |
|
|
36,796 |
|
|
|
38,415 |
|
| |
|
|
|
|
|
|
|
|
|
Other Assets
|
|
|
38,733 |
|
|
|
40,348 |
|
| |
|
|
|
|
|
|
|
|
|
Goodwill (Note 2)
|
|
|
98,653 |
|
|
|
97,622 |
|
| |
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$ |
321,692 |
|
|
$ |
307,656 |
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
Condensed Consolidated Balance Sheet (continued)
(Unaudited)
Liabilities and Shareholders’ Investment
| |
|
October 2,
|
|
|
January 2,
|
|
|
(In thousands, except share amounts)
|
|
2010
|
|
|
2010
|
|
| |
|
|
|
|
|
|
|
Current Liabilities:
|
|
|
|
|
|
|
|
Current maturities of long-term obligations (Note 7)
|
|
$ |
500 |
|
|
$ |
500 |
|
|
Accounts payable
|
|
|
21,111 |
|
|
|
17,612 |
|
|
Accrued payroll and employee benefits
|
|
|
13,311 |
|
|
|
11,515 |
|
|
Customer deposits
|
|
|
15,680 |
|
|
|
11,920 |
|
|
Other current liabilities
|
|
|
18,182 |
|
|
|
20,380 |
|
|
Liabilities of discontinued operation
|
|
|
2,426 |
|
|
|
2,427 |
|
|
Total Current Liabilities
|
|
|
71,210 |
|
|
|
64,354 |
|
| |
|
|
|
|
|
|
|
|
|
Other Long-Term Liabilities
|
|
|
25,064 |
|
|
|
26,521 |
|
| |
|
|
|
|
|
|
|
|
|
Long-Term Obligations (Note 7)
|
|
|
22,375 |
|
|
|
22,750 |
|
| |
|
|
|
|
|
|
|
|
|
Shareholders’ Investment:
|
|
|
|
|
|
|
|
|
|
Preferred stock, $.01 par value, 5,000,000 shares authorized; none issued
|
|
|
– |
|
|
|
– |
|
|
Common stock, $.01 par value, 150,000,000 shares authorized;
14,624,159 shares issued
|
|
|
146 |
|
|
|
146 |
|
|
Capital in excess of par value
|
|
|
93,693 |
|
|
|
92,244 |
|
|
Retained earnings
|
|
|
159,952 |
|
|
|
146,624 |
|
|
Treasury stock at cost, 2,438,608 and 2,219,221 shares
|
|
|
(50,211 |
) |
|
|
(46,558 |
) |
|
Accumulated other comprehensive items (Note 3)
|
|
|
(1,950 |
) |
|
|
252 |
|
|
Total Kadant Shareholders’ Investment
|
|
|
201,630 |
|
|
|
192,708 |
|
|
Noncontrolling interest
|
|
|
1,413 |
|
|
|
1,323 |
|
|
Total Shareholders’ Investment
|
|
|
203,043 |
|
|
|
194,031 |
|
| |
|
|
|
|
|
|
|
|
|
Total Liabilities and Shareholders’ Investment
|
|
$ |
321,692 |
|
|
$ |
307,656 |
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
Condensed Consolidated Statement of Operations
(Unaudited)
| |
|
Three Months Ended
|
|
| |
|
October 2,
|
|
|
October 3,
|
|
|
(In thousands, except per share amounts)
|
|
2010
|
|
|
2009
|
|
| |
|
|
|
|
|
|
|
Revenues
|
|
$ |
66,516 |
|
|
$ |
53,716 |
|
| |
|
|
|
|
|
|
|
|
|
Costs and Operating Expenses:
|
|
|
|
|
|
|
|
|
|
Cost of revenues
|
|
|
37,214 |
|
|
|
31,776 |
|
|
Selling, general, and administrative expenses
|
|
|
22,465 |
|
|
|
19,557 |
|
|
Research and development expenses
|
|
|
1,326 |
|
|
|
1,059 |
|
|
Restructuring costs and other income, net (Note 9)
|
|
|
(748 |
) |
|
|
513 |
|
| |
|
|
60,257 |
|
|
|
52,905 |
|
| |
|
|
|
|
|
|
|
|
|
Operating Income
|
|
|
6,259 |
|
|
|
811 |
|
| |
|
|
|
|
|
|
|
|
|
Interest Income
|
|
|
54 |
|
|
|
49 |
|
|
Interest Expense
|
|
|
(311 |
) |
|
|
(473 |
) |
| |
|
|
|
|
|
|
|
|
|
Income from Continuing Operations Before Provision for Income Taxes
|
|
|
6,002 |
|
|
|
387 |
|
|
Provision for Income Taxes
|
|
|
1,431 |
|
|
|
530 |
|
| |
|
|
|
|
|
|
|
|
|
Income (Loss) from Continuing Operations
|
|
|
4,571 |
|
|
|
(143 |
) |
|
Loss from Discontinued Operation (net of income tax benefit of $2 and $2)
|
|
|
(5 |
) |
|
|
(5 |
) |
| |
|
|
|
|
|
|
|
|
|
Net Income (Loss)
|
|
|
4,566 |
|
|
|
(148 |
) |
| |
|
|
|
|
|
|
|
|
|
Net (Income) Loss Attributable to Noncontrolling Interest
|
|
|
(69 |
) |
|
|
29 |
|
| |
|
|
|
|
|
|
|
|
|
Net Income (Loss) Attributable to Kadant
|
|
$ |
4,497 |
|
|
$ |
(119 |
) |
| |
|
|
|
|
|
|
|
|
|
Amounts Attributable to Kadant:
|
|
|
|
|
|
|
|
|
|
Income (Loss) from Continuing Operations
|
|
$ |
4,502 |
|
|
$ |
(114 |
) |
|
Loss from Discontinued Operation
|
|
|
(5 |
) |
|
|
(5 |
) |
|
Net Income (Loss) Attributable to Kadant
|
|
$ |
4,497 |
|
|
$ |
(119 |
) |
| |
|
|
|
|
|
|
|
|
|
Basic and Diluted Earnings (Loss) per Share from Continuing Operations Attributable to Kadant (Note 4)
|
|
$ |
.36 |
|
|
$ |
(.01 |
) |
| |
|
|
|
|
|
|
|
|
|
Basic and Diluted Earnings (Loss) per Share Attributable to Kadant (Note 4)
|
|
$ |
.36 |
|
|
$ |
(.01 |
) |
| |
|
|
|
|
|
|
|
|
|
Weighted Average Shares (Note 4):
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
12,336 |
|
|
|
12,270 |
|
| |
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
12,487 |
|
|
|
12,270 |
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
Condensed Consolidated Statement of Operations
(Unaudited)
| |
|
Nine Months Ended
|
|
| |
|
October 2,
|
|
|
October 3,
|
|
|
(In thousands, except per share amounts)
|
|
2010
|
|
|
2009
|
|
| |
|
|
|
|
|
|
|
Revenues
|
|
$ |
196,773 |
|
|
$ |
168,805 |
|
| |
|
|
|
|
|
|
|
|
|
Costs and Operating Expenses:
|
|
|
|
|
|
|
|
|
|
Cost of revenues
|
|
|
109,428 |
|
|
|
101,441 |
|
|
Selling, general, and administrative expenses
|
|
|
66,270 |
|
|
|
61,010 |
|
|
Research and development expenses
|
|
|
3,904 |
|
|
|
4,251 |
|
|
Restructuring costs and other income, net (Note 9)
|
|
|
(1,071 |
) |
|
|
2,283 |
|
| |
|
|
178,531 |
|
|
|
168,985 |
|
| |
|
|
|
|
|
|
|
|
|
Operating Income (Loss)
|
|
|
18,242 |
|
|
|
(180 |
) |
| |
|
|
|
|
|
|
|
|
|
Interest Income
|
|
|
124 |
|
|
|
348 |
|
|
Interest Expense
|
|
|
(1,008 |
) |
|
|
(1,793 |
) |
| |
|
|
|
|
|
|
|
|
|
Income (Loss) from Continuing Operations Before Provision for Income Taxes
|
|
|
17,358 |
|
|
|
(1,625 |
) |
|
Provision for Income Taxes (Note 6)
|
|
|
3,864 |
|
|
|
2,596 |
|
| |
|
|
|
|
|
|
|
|
|
Income (Loss) from Continuing Operations
|
|
|
13,494 |
|
|
|
(4,221 |
) |
|
Loss from Discontinued Operation (net of income tax benefit of $7 and $7)
|
|
|
(14 |
) |
|
|
(14 |
) |
| |
|
|
|
|
|
|
|
|
|
Net Income (Loss)
|
|
|
13,480 |
|
|
|
(4,235 |
) |
| |
|
|
|
|
|
|
|
|
|
Net (Income) Loss Attributable to Noncontrolling Interest
|
|
|
(152 |
) |
|
|
32 |
|
| |
|
|
|
|
|
|
|
|
|
Net Income (Loss) Attributable to Kadant
|
|
$ |
13,328 |
|
|
$ |
(4,203 |
) |
| |
|
|
|
|
|
|
|
|
|
Amounts Attributable to Kadant:
|
|
|
|
|
|
|
|
|
|
Income (Loss) from Continuing Operations
|
|
$ |
13,342 |
|
|
$ |
(4,189 |
) |
|
Loss from Discontinued Operation
|
|
|
(14 |
) |
|
|
(14 |
) |
|
Net Income (Loss) Attributable to Kadant
|
|
$ |
13,328 |
|
|
$ |
(4,203 |
) |
| |
|
|
|
|
|
|
|
|
|
Earnings (Loss) per Share from Continuing Operations Attributable to Kadant (Note 4):
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
1.08 |
|
|
$ |
(.34 |
) |
|
Diluted
|
|
$ |
1.07 |
|
|
$ |
(.34 |
) |
| |
|
|
|
|
|
|
|
|
|
Earnings (Loss) per Share Attributable to Kadant (Note 4):
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
1.08 |
|
|
$ |
(.34 |
) |
|
Diluted
|
|
$ |
1.07 |
|
|
$ |
(.34 |
) |
| |
|
|
|
|
|
|
|
|
|
Weighted Average Shares (Note 4):
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
12,391 |
|
|
|
12,347 |
|
| |
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
12,509 |
|
|
|
12,347 |
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
Condensed Consolidated Statement of Cash Flows
(Unaudited)
| |
|
Nine Months Ended
|
|
| |
|
October 2,
|
|
|
October 3,
|
|
|
(In thousands)
|
|
2010
|
|
|
2009
|
|
| |
|
|
|
|
|
|
|
Operating Activities:
|
|
|
|
|
|
|
|
Net income (loss) attributable to Kadant
|
|
$ |
13,328 |
|
|
$ |
(4,203 |
) |
|
Net income (loss) attributable to noncontrolling interest
|
|
|
152 |
|
|
|
(32 |
) |
|
Loss from discontinued operation
|
|
|
14 |
|
|
|
14 |
|
|
Income (loss) from continuing operations
|
|
|
13,494 |
|
|
|
(4,221 |
) |
|
Adjustments to reconcile income (loss) from continuing operations to net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
5,281 |
|
|
|
5,595 |
|
|
Stock-based compensation expense
|
|
|
2,018 |
|
|
|
1,990 |
|
|
Provision for losses on accounts receivable
|
|
|
587 |
|
|
|
285 |
|
|
Gain on the sale of property, plant, and equipment, net (Note 9)
|
|
|
(1,029 |
) |
|
|
(5 |
) |
|
Other non-cash items, net
|
|
|
1,496 |
|
|
|
826 |
|
|
Changes in assets and liabilities, excluding the effects of acquisitions:
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(7,327 |
) |
|
|
16,592 |
|
|
Unbilled contract costs and fees
|
|
|
(1,098 |
) |
|
|
3,635 |
|
|
Inventories
|
|
|
(5,138 |
) |
|
|
17,255 |
|
|
Other assets
|
|
|
(592 |
) |
|
|
8,969 |
|
|
Accounts payable
|
|
|
3,537 |
|
|
|
(8,579 |
) |
|
Contributions to pension plan
|
|
|
(1,975 |
) |
|
|
(3,600 |
) |
|
Other liabilities
|
|
|
5,166 |
|
|
|
(6,978 |
) |
|
Net cash provided by continuing operations
|
|
|
14,420 |
|
|
|
31,764 |
|
|
Net cash provided by discontinued operation
|
|
|
6 |
|
|
|
7 |
|
|
Net cash provided by operating activities
|
|
|
14,426 |
|
|
|
31,771 |
|
| |
|
|
|
|
|
|
|
|
|
Investing Activities:
|
|
|
|
|
|
|
|
|
|
Acquisitions, net of cash acquired (Note 2)
|
|
|
(5,774 |
) |
|
|
(1,135 |
) |
|
Purchases of property, plant, and equipment
|
|
|
(2,035 |
) |
|
|
(2,379 |
) |
|
Proceeds from sale of property, plant, and equipment (Note 9)
|
|
|
2,893 |
|
|
|
92 |
|
|
Other, net
|
|
|
(60 |
) |
|
|
(219 |
) |
|
Net cash used in continuing operations for investing activities
|
|
|
(4,976 |
) |
|
|
(3,641 |
) |
| |
|
|
|
|
|
|
|
|
|
Financing Activities:
|
|
|
|
|
|
|
|
|
|
Repayments of short- and long-term obligations
|
|
|
(375 |
) |
|
|
(54,028 |
) |
|
Proceeds from issuance of long-term obligations
|
|
|
– |
|
|
|
22,000 |
|
|
Purchases of Company common stock
|
|
|
(4,407 |
) |
|
|
(3,722 |
) |
|
Other, net
|
|
|
13 |
|
|
|
13 |
|
|
Net cash used in continuing operations for financing activities
|
|
|
(4,769 |
) |
|
|
(35,737 |
) |
| |
|
|
|
|
|
|
|
|
|
Exchange Rate Effect on Cash and Cash Equivalents
|
|
|
(870 |
) |
|
|
1,559 |
|
| |
|
|
|
|
|
|
|
|
|
Change in Cash from Discontinued Operation
|
|
|
1 |
|
|
|
– |
|
| |
|
|
|
|
|
|
|
|
|
Increase (Decrease) in Cash and Cash Equivalents
|
|
|
3,812 |
|
|
|
(6,048 |
) |
|
Cash and Cash Equivalents at Beginning of Period
|
|
|
45,675 |
|
|
|
40,139 |
|
|
Cash and Cash Equivalents at End of Period
|
|
$ |
49,487 |
|
|
$ |
34,091 |
|
| |
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
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 October 2, 2010, and its results of operations for the three- and nine-month periods ended October 2, 2010 and October 3, 2009 and cash flows for the nine-month periods ended October 2, 2010 and October 3, 2009. Interim results are not necessarily indicative of results for a full year.
The condensed consolidated balance sheet presented as of January 2, 2010, has been derived from the consolidated financial statements that have been audited by the Company’s independent registered public accounting firm. The condensed consolidated financial statements and related notes are presented as permitted by Form 10-Q and do not contain certain information included in the annual consolidated financial statements and related notes of the Company. The condensed consolidated financial statements and notes included herein should be read in conjunction with the consolidated financial statements and related notes included in the Company’s Annual Report on Form 10-K for the fiscal year ended January 2, 2010, filed with the Securities and Exchange Commission.
Certain prior-period amounts within operating activities in the statement of cash flows have been reclassified from other non-cash items, net, and shown separately within operating activities to conform to the 2010 presentation.
Supplemental Cash Flow Information
| |
|
October 2,
|
|
|
October 3,
|
|
|
(In thousands)
|
|
2010
|
|
|
2009
|
|
|
Non-Cash Investing Activities:
|
|
|
|
|
|
|
|
Fair Value of Assets Acquired
|
|
$ |
4,672 |
|
|
$ |
– |
|
|
Cash Paid for Acquired Businesses
|
|
|
(3,299 |
) |
|
|
– |
|
|
Fair Value of Liabilities Assumed
|
|
$ |
1,373 |
|
|
$ |
– |
|
| |
|
|
|
|
|
|
|
|
|
Non-Cash Financing Activities:
|
|
|
|
|
|
|
|
|
|
Issuance of Restricted Stock
|
|
$ |
422 |
|
|
$ |
118 |
|
On July 16, 2010, the Company’s Kadant Canada Corp. subsidiary acquired all of the stock of Filtration Fibrewall Inc. (Fibrewall), and certain assets of a related company, Services Techniques HDS Inc. (HDS), Canadian-based suppliers of pressure screen baskets and dewatering equipment for use in the pulp and paper industry. The aggregate purchase price for these acquisitions was $3,958,000, of which $3,299,000 was paid at closing, $215,000 will be paid in the fourth quarter of 2010, and $444,000 of contingent consideration will be paid over the next three years based on the sales of HDS products. The Company believes that the acquisition of these businesses will enhance the Company’s screen basket product offerings, as well as its capital equipment screening product offerings, within the Papermaking Systems segment’s stock-preparation equipment product line.
The Company’s acquisitions have historically been made at prices above the fair value of the acquired assets, resulting in goodwill, due to expectations of synergies of combining the businesses. For these acquisitions, the primary synergy will be the use of the Company’s existing commercial infrastructure to expand sales of the acquired businesses’ products.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
|
2.
|
Acquisitions (continued)
|
The acquisitions have been accounted for using the purchase method of accounting, and the results of Fibrewall and HDS have been included in the accompanying financial statements from their dates of acquisition. Acquisition transaction costs of approximately $330,000 in the first nine months of 2010 were recorded in selling, general, and administrative expenses. Allocation of the purchase price for the acquisitions was based on estimates of the fair value of the net assets acquired. The purchase price allocations include identifiable intangible assets acquired of $1,139,000, which are being amortized using the straight-line method over a weighted-average period of 8 years. The excess of the acquisitions’ purchase price over the tangible and identifiable intangible assets was recorded as goodwill and totaled $2,587,000, of which $753,000 is fully deductible for tax purposes. The allocation of the acquisitions’ purchase price is subject to adjustment upon finalization of third-party valuations, and therefore the current measurements of intangible assets acquired, goodwill, assumed liabilities, and deferred income taxes are subject to change.
Pro forma disclosures of the results of operations are not required, as the acquisitions are not considered material business combinations, individually or in the aggregate, as outlined in Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 805, “Business Combinations.”
In the first nine months of 2010, the Company also made final consideration payments totaling $2,592,000 for acquisitions completed prior to 2010.
Comprehensive income attributable to Kadant combines net income (loss), other comprehensive items, and comprehensive income attributable to noncontrolling interest. Other comprehensive items represent certain amounts that are reported as components of shareholders’ investment in the accompanying condensed consolidated balance sheet, including foreign currency translation adjustments, deferred gains and losses and unrecognized prior service loss associated with pension and other post-retirement plans, and deferred gains and losses on hedging instruments. The components of comprehensive income attributable to Kadant are as follows:
| |
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
| |
|
October 2,
|
|
|
October 3,
|
|
|
October 2,
|
|
|
October 3,
|
|
|
(In thousands)
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income (Loss)
|
|
$ |
4,566 |
|
|
$ |
(148 |
) |
|
$ |
13,480 |
|
|
$ |
(4,235 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Comprehensive Items:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign Currency Translation Adjustment
|
|
|
7,675 |
|
|
|
2,527 |
|
|
|
(2,043 |
) |
|
|
6,578 |
|
|
Pension and Other Post-Retirement Liability Adjustments,
net (net of income tax of $40 and $148 in the three and
nine months ended October 2, 2010, respectively, and
$20 and $(98) in the three and nine months ended
October 3, 2009, respectively)
|
|
|
76 |
|
|
|
33 |
|
|
|
280 |
|
|
|
(182 |
) |
|
Deferred Gain (Loss) on Hedging Instruments (net of income
tax of $164 and $(15) in the three and nine months
ended October 2, 2010, respectively, and $80 and $31
in the three and nine months ended October 3, 2009, respectively)
|
|
|
168 |
|
|
|
84 |
|
|
|
(500 |
) |
|
|
335 |
|
| |
|
|
7,919 |
|
|
|
2,644 |
|
|
|
(2,263 |
) |
|
|
6,731 |
|
|
Comprehensive Income
|
|
|
12,485 |
|
|
|
2,496 |
|
|
|
11,217 |
|
|
|
2,496 |
|
|
Comprehensive Income Attributable to Noncontrolling Interest
|
|
|
(197 |
) |
|
|
(27 |
) |
|
|
(91 |
) |
|
|
(36 |
) |
|
Comprehensive Income Attributable to Kadant
|
|
$ |
12,288 |
|
|
$ |
2,469 |
|
|
$ |
11,126 |
|
|
$ |
2,460 |
|
Notes to Condensed Consolidated Financial Statements
(Unaudited)
|
4.
|
Earnings (Loss) per Share
|
Basic and diluted earnings (loss) per share are calculated as follows:
| |
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
| |
|
October 2,
|
|
|
October 3,
|
|
|
October 2,
|
|
|
October 3,
|
|
|
(In thousands, except per share amounts)
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts Attributable to Kadant:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (Loss) from Continuing Operations
|
|
$ |
4,502 |
|
|
$ |
(114 |
) |
|
$ |
13,342 |
|
|
$ |
(4,189 |
) |
|
Loss from Discontinued Operation
|
|
|
(5 |
) |
|
|
(5 |
) |
|
|
(14 |
) |
|
|
(14 |
) |
|
Net Income (Loss)
|
|
$ |
4,497 |
|
|
$ |
(119 |
) |
|
$ |
13,328 |
|
|
$ |
(4,203 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic Weighted Average Shares
|
|
|
12,336 |
|
|
|
12,270 |
|
|
|
12,391 |
|
|
|
12,347 |
|
|
Effect of Stock Options, Restricted Stock Units
and Employee Stock Purchase Plan
|
|
|
151 |
|
|
|
– |
|
|
|
118 |
|
|
|
– |
|
|
Diluted Weighted Average Shares
|
|
|
12,487 |
|
|
|
12,270 |
|
|
|
12,509 |
|
|
|
12,347 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic Earnings (Loss) per Share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing Operations
|
|
$ |
.36 |
|
|
$ |
(.01 |
) |
|
$ |
1.08 |
|
|
$ |
(.34 |
) |
|
Discontinued Operation
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
Net Income (Loss)
|
|
$ |
.36 |
|
|
$ |
(.01 |
) |
|
$ |
1.08 |
|
|
$ |
(.34 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted Earnings (Loss) per Share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing Operations
|
|
$ |
.36 |
|
|
$ |
(.01 |
) |
|
$ |
1.07 |
|
|
$ |
(.34 |
) |
|
Discontinued Operation
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
Net Income (Loss)
|
|
$ |
.36 |
|
|
$ |
(.01 |
) |
|
$ |
1.07 |
|
|
$ |
(.34 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options to purchase approximately 161,200 and 38,100 shares of the Company’s common stock for the third quarters of 2010 and 2009, respectively, and 132,400 and 51,700 shares of the Company’s common stock for the first nine months of 2010 and 2009, 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 Company’s common stock and the effect of their inclusion would have been anti-dilutive. In addition, the dilutive effect of restricted stock units totaling 90,300 and 55,600 shares of common stock was not included in the computation of diluted loss per share in the three- and nine-month periods ended October 3, 2009, respectively, as the effect would have been anti-dilutive.
The components of inventories are as follows:
| |
|
October 2,
|
|
|
January 2,
|
|
|
(In thousands)
|
|
2010
|
|
|
2010
|
|
|
Raw Materials and Supplies
|
|
$ |
16,610 |
|
|
$ |
15,347 |
|
|
Work in Process
|
|
|
9,411 |
|
|
|
7,500 |
|
|
Finished Goods
|
|
|
16,748 |
|
|
|
14,588 |
|
| |
|
$ |
42,769 |
|
|
$ |
37,435 |
|
Notes to Condensed Consolidated Financial Statements
(Unaudited)
The provision for income taxes was $3,864,000, or 22.3% of pre-tax income, and $2,596,000, or (159.8%) of pre-tax loss, in the first nine months of 2010 and 2009, respectively. The effective tax rate of 22.3% in the first nine months of 2010 was lower than the Company’s statutory rate primarily due to a favorable geographic distribution of earnings, the expected release of valuation allowances associated with the expected utilization in 2010 of various deferred tax assets that had been fully reserved in prior periods, and the utilization of foreign tax credits in the U.S. The effective tax rate of (159.8)% in the first nine months of 2009 was higher than the Company’s statutory rate primarily due to the valuation allowance the Company established in the first nine months of 2009 for certain foreign deferred tax assets; and the tax impact of the full valuation allowance the Company established for certain U.S. deferred tax assets as a result of the Company’s accumulated loss position in the U.S. and the uncertainty of profitability in future periods.
Long-Term Obligations
Long-Term obligations are as follows:
| |
|
October 2,
|
|
|
January 2,
|
|
|
(In thousands)
|
|
2010
|
|
|
2010
|
|
| |
|
|
|
|
|
|
|
Revolving Credit Facility
|
|
$ |
15,000 |
|
|
$ |
15,000 |
|
|
Commercial Real Estate Loan, due from 2010 to 2016
|
|
|
7,875 |
|
|
|
8,250 |
|
|
Total Long-Term Obligations
|
|
|
22,875 |
|
|
|
23,250 |
|
|
Less: Current Maturities
|
|
|
(500 |
) |
|
|
(500 |
) |
|
Long-Term Obligations, less Current Maturities
|
|
$ |
22,375 |
|
|
$ |
22,750 |
|
The weighted average interest rate for long-term obligations was 4.73% as of October 2, 2010.
Revolving Credit Facility
On February 13, 2008, the Company entered into a five-year unsecured revolving credit facility (2008 Credit Agreement) in the aggregate principal amount of up to $75,000,000. The 2008 Credit Agreement also includes an uncommitted unsecured incremental borrowing facility of up to an additional $75,000,000. The principal on any borrowings made under the 2008 Credit Agreement is due on February 13, 2013. As of October 2, 2010, the outstanding balance on the 2008 Credit Agreement was $15,000,000. Based on the Company’s maximum leverage ratio and consolidated EBITDA (earnings before interest, taxes, depreciation, and amortization), as defined in the 2008 Credit Agreement, as of October 2, 2010, the Company would have been able to borrow an additional $58,296,000 under the Company’s credit agreements.
Commercial Real Estate Loan
On May 4, 2006, the Company borrowed $10,000,000 under a promissory note (2006 Commercial Real Estate Loan), which is repayable in quarterly installments of $125,000 over a ten-year period with the remaining principal balance of $5,000,000 due upon maturity. As of October 2, 2010, the remaining balance on the 2006 Commercial Real Estate Loan was $7,875,000. The 2006 Commercial Real Estate Loan is guaranteed and secured by real estate and related personal property of the Company and certain of its domestic subsidiaries, located in Theodore, Alabama; Auburn, Massachusetts; and Three Rivers, Michigan, pursuant to mortgage and security agreements dated May 4, 2006.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
The Company provides for the estimated cost of product warranties at the time of sale based on the actual historical occurrence rates and repair costs. 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 accrued warranty costs included in other current liabilities in the accompanying condensed consolidated balance sheet are as follows:
| |
|
Nine Months Ended
|
|
|
(In thousands)
|
|
October 2, 2010
|
|
| |
|
|
|
|
Balance at Beginning of Period
|
|
$ |
2,801 |
|
|
Provision
|
|
|
1,665 |
|
|
Usage
|
|
|
(1,176 |
) |
|
Currency translation
|
|
|
(40 |
) |
|
Balance at End of Period
|
|
$ |
3,250 |
|
| |
|
|
|
|
See Note 18 for warranty information related to the discontinued operation.
|
9.
|
Restructuring Costs and Other Income, Net
|
2008 Restructuring Plan
The Company recorded restructuring costs of $4,373,000 in 2008 and 2009 associated with its 2008 Restructuring Plan. These restructuring costs included facility-related costs of $314,000 and severance and associated costs of $4,059,000 related to the reduction of 329 full-time positions in China, North America, Latin America, and Europe, all in its Papermaking Systems segment. These actions were taken to adjust the Company’s cost structure and streamline its operations in response to the weak economic environment, which accelerated in the fourth quarter of 2008, and its negative impact on then current and projected order volumes, especially in its stock-preparation equipment product line. The Company recorded additional restructuring costs of $67,000 in the first nine months of 2010 associated with its 2008 Restructuring Plan.
2009 Restructuring Plan
The Company recorded restructuring costs of $3,858,000 in 2009 associated with its 2009 Restructuring Plan, which consisted of severance and associated costs related to the reduction of 133 full-time positions in Europe, China, the U.S., and Canada, all in its Papermaking Systems segment. These actions were taken to further adjust the Company’s cost structure and streamline its operations in response to the continued weak economic environment. The Company recorded additional restructuring costs of $114,000 in the first nine months of 2010 associated with its 2009 Restructuring Plan.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
|
9.
|
Restructuring Costs and Other Income, Net (continued)
|
A summary of the changes in accrued restructuring costs, of which $177,000 is included in other current liabilities and $430,000 is included in other long-term liabilities in the accompanying condensed consolidated balance sheet, is as follows:
|
(In thousands)
|
|
Severance
Costs
|
|
|
Other
Costs
|
|
|
Total
Costs
|
|
| |
|
|
|
|
|
|
|
|
|
|
2008 Restructuring Plan
|
|
|
|
|
|
|
|
|
|
|
Balance at January 2, 2010
|
|
$ |
1,334 |
|
|
$ |
– |
|
|
$ |
1,334 |
|
|
Provision
|
|
|
42 |
|
|
|
25 |
|
|
|
67 |
|
|
Payments
|
|
|
(826 |
) |
|
|
(25 |
) |
|
|
(851 |
) |
|
Currency translation
|
|
|
10 |
|
|
|
– |
|
|
|
10 |
|
|
Balance at October 2, 2010
|
|
$ |
560 |
|
|
$ |
– |
|
|
$ |
560 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 Restructuring Plan
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at January 2, 2010
|
|
$ |
2,302 |
|
|
$ |
– |
|
|
$ |
2,302 |
|
|
Provision
|
|
|
114 |
|
|
|
– |
|
|
|
114 |
|
|
Payments
|
|
|
(2,257 |
) |
|
|
– |
|
|
|
(2,257 |
) |
|
Currency translation
|
|
|
(112 |
) |
|
|
– |
|
|
|
(112 |
) |
|
Balance at October 2, 2010
|
|
$ |
47 |
|
|
$ |
– |
|
|
$ |
47 |
|
The Company expects to pay the remaining accrued restructuring costs as follows: $130,000 in 2010 and $477,000 from 2011 to 2015.
Other Income
In the first quarter of 2010, the Company sold real estate in the U.S. for cash proceeds of $465,000, resulting in a pre-tax gain of $285,000. In the second quarter of 2010, the Company recognized a curtailment gain on a pension liability of $219,000 associated with the reduction of 25 full-time positions in France. In the third quarter of 2010, the Company sold real estate in the U.S. for cash proceeds of $2,118,000, resulting in a pre-tax gain of $748,000.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
|
10.
|
Business Segment Information
|
The Company has one reportable operating segment, Papermaking Systems, and a separate product line, Fiber-based Products, which is reported in Other Business. 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
|
|
|
Nine Months Ended
|
|
| |
|
October 2,
|
|
|
October 3,
|
|
|
October 2,
|
|
|
October 3,
|
|
|
(In thousands)
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Papermaking Systems
|
|
$ |
65,269 |
|
|
$ |
52,356 |
|
|
$ |
189,691 |
|
|
$ |
162,338 |
|
|
Other Business
|
|
|
1,247 |
|
|
|
1,360 |
|
|
|
7,082 |
|
|
|
6,467 |
|
| |
|
$ |
66,516 |
|
|
$ |
53,716 |
|
|
$ |
196,773 |
|
|
$ |
168,805 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (Loss) from Continuing Operations Before
Provision for Income Taxes:
|
|
|
|
|
|
|
|
|
|
|
Papermaking Systems
|
|
$ |
10,101 |
|
|
$ |
3,898 |
|
|
$ |
27,300 |
|
|
$ |
7,480 |
|
|
Corporate and Other Business (a)
|
|
|
(3,842 |
) |
|
|
(3,087 |
) |
|
|
(9,058 |
) |
|
|
(7,660 |
) |
|
Total Operating Income (Loss)
|
|
|
6,259 |
|
|
|
811 |
|
|
|
18,242 |
|
|
|
(180 |
) |
|
Interest Expense, Net
|
|
|
(257 |
) |
|
|
(424 |
) |
|
|
(884 |
) |
|
|
(1,445 |
) |
| |
|
$ |
6,002 |
|
|
$ |
387 |
|
|
$ |
17,358 |
|
|
$ |
(1,625 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital Expenditures:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Papermaking Systems
|
|
$ |
650 |
|
|
$ |
306 |
|
|
$ |
1,710 |
|
|
$ |
2,161 |
|
|
Corporate and Other Business
|
|
|
93 |
|
|
|
33 |
|
|
|
325 |
|
|
|
218 |
|
| |
|
$ |
743 |
|
|
$ |
339 |
|
|
$ |
2,035 |
|
|
$ |
2,379 |
|
|
|
(a)
|
Corporate primarily includes general and administrative expenses.
|
|
11.
|
Stock-Based Compensation
|
Stock Options
On March 3, 2010, the Company granted stock options to purchase 140,000 shares of the Company’s common stock to certain officers of the Company. The stock options will vest in three equal annual installments on the first, second, and third anniversaries of the grant date, provided that the executive officer remains employed by the Company on the applicable vesting dates. The Company is recognizing compensation expense ratably over the vesting period based on the grant date fair value of $7.39 determined using the Black-Scholes option-pricing model. Compensation expense of $86,000 and $201,000 was recognized in the three- and nine-month periods ending October 2, 2010, respectively, associated with these stock options. Unrecognized compensation expense related to these stock options totaled approximately $834,000 at October 2, 2010 and will be recognized over a weighted average period of 2.4 years.
Restricted Stock Units
The Company recognized compensation expense of $53,000 and $195,000 in the three- and nine-month periods ending October 2, 2010, respectively, associated with restricted stock units (RSUs) granted to its outside directors, which vest in quarterly installments through the end of 2010. The Company also has outstanding an aggregate of 30,000 RSUs granted to its outside directors with an aggregate fair value of $425,100, which will only vest and compensation expense will only be recognized upon a change in control as defined in the Company’s 2006 equity incentive plan. The 30,000 RSUs will be forfeited if a change in control does not occur prior to the last day of the first quarter of 2015.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
|
11.
|
Stock-Based Compensation (continued)
|
Performance-Based Restricted Stock Units
On March 3, 2010, the Company granted to certain officers of the Company performance-based RSUs, which represent, in aggregate, the right to receive 59,000 shares (the target RSU amount), subject to adjustment, with a grant date fair value of $14.17 per share. The RSUs will vest in three equal annual installments on March 10, 2011, March 10, 2012 and March 10, 2013, provided that the Company meets certain performance requirements for the 2010 fiscal year and the executive officer is employed by the Company on the applicable vesting dates. The target RSU amount is subject to adjustment based on the achievement of a specified EBITDA target generated from continuing operations for the 2010 fiscal year. The RSUs provide for an adjustment of between 50% and 150% of the target RSU amount based on whether actual EBITDA for the 2010 fiscal year is between 50% and 115% of the EBITDA target. If actual EBITDA is below 50% of the target EBITDA for the 2010 fiscal year, all of the RSUs will be forfeited. In the first nine months of 2010, the Company recognized compensation expense based on the probable number of RSUs expected to vest, which was 150% of the target RSU amount.
The performance-based RSU agreements provide for forfeiture in certain events, such as voluntary or involuntary termination of employment, and for acceleration of vesting in the event of a change in control of the Company. If a change in control occurs prior to the end of the performance period, the officer will receive the target RSU amount; otherwise, the officer will receive the number of deliverable RSUs based on the achievement of the performance goal, as stated in the RSU agreements.
Each performance-based RSU represents the right to receive one share of the Company’s common stock upon vesting. The Company has also granted performance-based RSUs in prior periods. Compensation expense associated with performance-based RSUs is recognized ratably over each vesting tranche based on the grant date fair value. The Company recognized compensation expense of $362,000 and $536,000 in the third quarters of 2010 and 2009, respectively, and $986,000 and $1,467,000 in the first nine months of 2010 and 2009, respectively, associated with performance-based RSUs. Unrecognized compensation expense related to the unvested performance-based RSUs totaled approximately $1,041,000 at October 2, 2010, and will be recognized over a weighted average period of 1.4 years.
Time-Based Restricted Stock Units
On March 3, 2010, the Company granted 85,000 time-based RSUs to certain employees of the Company with a grant date fair value of $14.17 per share. The RSUs generally vest in three equal installments on March 10, 2011, March 10, 2012 and March 10, 2013. The Company also granted time-based RSUs in prior periods to certain employees of the Company. Each time-based RSU represents the right to receive one share of the Company’s common stock upon vesting. The Company is recognizing compensation expense associated with these time-based RSUs ratably over the vesting period based on the grant date fair value. The Company recognized compensation expense of $216,000 and $92,000 in the third quarters of 2010 and 2009, respectively, and $563,000 and $322,000 in the first nine months of 2010 and 2009, respectively, associated with time-based RSUs. Unrecognized compensation expense related to the time-based RSUs totaled approximately $1,327,000 as of October 2, 2010, and will be recognized over a weighted average period of 2.1 years.
A summary of the changes in the Company’s unvested RSUs for the first nine months of 2010 is as follows:
| |
|
Units
(In thousands)
|
|
|
Weighted- Average Grant-Date Fair Value
|
|
| |
|
|
|
|
|
|
|
Unvested RSUs at January 2, 2010
|
|
|
212 |
|
|
$ |
17.89 |
|
|
Granted (based on the target RSU amount)
|
|
|
204 |
|
|
$ |
14.17 |
|
|
Vested
|
|
|
(24 |
) |
|
$ |
14.23 |
|
|
Forfeited
|
|
|
(59 |
) |
|
$ |
9.56 |
|
|
Unvested RSUs at October 2, 2010
|
|
|
333 |
|
|
$ |
17.94 |
|
Notes to Condensed Consolidated Financial Statements
(Unaudited)
|
12.
|
Employee Benefit Plans
|
The Company sponsors a noncontributory defined benefit retirement plan for the benefit of eligible employees at its Kadant Solutions division and the corporate office. 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. The Company also has a post-retirement welfare benefits plan for certain retirees of its Kadant Solutions division (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 employer’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 plan will be closed to employees who will not meet its retirement eligibility requirements on January 1, 2012.
The components of the net periodic benefit cost (income) for the pension benefits and other benefits plans in the three-and nine-month periods ended October 2, 2010 and October 3, 2009 are as follows:
| |
|
Three Months Ended
|
|
|
Three Months Ended
|
|
|
(In thousands)
|
|
October 2, 2010
|
|
|
October 3, 2009
|
|
| |
|
Pension Benefits
|
|
|
Other
Benefits
|
|
|
Pension Benefits
|
|
|
Other
Benefits
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Components of Net Periodic Benefit Cost:
|
|
|
|
|
|
|
|
|
|
|
|
Service cost
|
|
$ |
197 |
|
|
$ |
25 |
|
|
$ |
205 |
|
|
$ |
37 |
|
|
Interest cost
|
|
|
322 |
|
|
|
54 |
|
|
|
330 |
|
|
|
65 |
|
|
Expected return on plan assets
|
|
|
(347 |
) |
|
|
– |
|
|
|
(324 |
) |
|
|
– |
|
|
Recognized net actuarial loss
|
|
|
110 |
|
|
|
3 |
|
|
|
124 |
|
|
|
2 |
|
|
Amortization of prior service cost (income)
|
|
|
14 |
|
|
|
(15 |
) |
|
|
14 |
|
|
|
(91 |
) |
|
Net periodic benefit cost
|
|
$ |
296 |
|
|
$ |
67 |
|
|
$ |
349 |
|
|
$ |
13 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The weighted average assumptions used to determine net periodic benefit cost are as follows:
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount rate
|
|
|
5.75 |
% |
|
|
4.84 |
% |
|
|
6.25 |
% |
|
|
6.20 |
% |
|
Expected long-term return on plan assets
|
|
|
7.00 |
% |
|
|
– |
|
|
|
8.50 |
% |
|
|
– |
|
|
Rate of compensation increase
|
|
|
4.00 |
% |
|
|
2.00 |
% |
|
|
4.00 |
% |
|
|
2.00 |
% |
Notes to Condensed Consolidated Financial Statements
(Unaudited)
|
12.
|
Employee Benefit Plans (continued)
|
| |
|
Nine Months Ended
|
|
|
Nine Months Ended
|
|
|
(In thousands)
|
|
October 2, 2010
|
|
|
October 3, 2009
|
|
| |
|
Pension Benefits
|
|
|
Other
Benefits
|
|
|
Pension Benefits
|
|
|
Other
Benefits
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Components of Net Periodic Benefit Cost (Income):
|
|
|
|
|
|
|
|
|
|
|
|
Service cost
|
|
$ |
623 |
|
|
$ |
76 |
|
|
$ |
615 |
|
|
$ |
107 |
|
|
Interest cost
|
|
|
972 |
|
|
|
164 |
|
|
|
990 |
|
|
|
189 |
|
|
Expected return on plan assets
|
|
|
(1,065 |
) |
|
|
– |
|
|
|
(972 |
) |
|
|
– |
|
|
Recognized net actuarial loss
|
|
|
327 |
|
|
|
9 |
|
|
|
372 |
|
|
|
4 |
|
|
Amortization of prior service cost (income)
|
|
|
42 |
|
|
|
(45 |
) |
|
|
42 |
|
|
|
(364 |
) |
|
Net periodic benefit cost (income)
|
|
|
899 |
|
|
|
204 |
|
|
|
1,047 |
|
|
|
(64 |
) |
|
Curtailment gain
|
|
|
– |
|
|
|
(219 |
) |
|
|
– |
|
|
|
(279 |
) |
|
Net periodic benefit cost (income)
|
|
$ |
899 |
|
|
$ |
(15 |
) |
|
$ |
1,047 |
|
|
$ |
(343 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The weighted average assumptions used to determine net periodic benefit cost (income) are as follows:
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount rate
|
|
|
5.75 |
% |
|
|
5.01 |
% |
|
|
6.25 |
% |
|
|
6.15 |
% |
|
Expected long-term return on plan assets
|
|
|
7.00 |
% |
|
|
– |
|
|
|
8.50 |
% |
|
|
– |
|
|
Rate of compensation increase
|
|
|
4.00 |
% |
|
|
2.00 |
% |
|
|
4.00 |
% |
|
|
2.00 |
% |
The Company recognized a curtailment gain of $219,000 in the second quarter of 2010 associated with the reduction of 25 full-time positions in France. The Company recognized a curtailment gain of $279,000 in the second quarter of 2009 associated with the reduction of 11 full-time positions in the U.S.
The Company made cash contributions of $1,975,000 to its Kadant Solutions division’s noncontributory defined benefit retirement plan in the first nine months of 2010 and expects to make cash contributions of $75,000 per month over the remainder of 2010. For the remaining pension and post-retirement welfare benefits plans, no cash contributions other than the funding of current benefit payments are expected in 2010.
The Company uses derivative instruments primarily to reduce its exposure to changes in currency exchange rates and interest rates. When the Company enters into a derivative contract, the Company makes a determination as to whether the transaction is deemed to be a hedge for accounting purposes. For a contract deemed to be a hedge, the Company formally documents the relationship between the derivative instrument and the risk being hedged. In this documentation, the Company specifically identifies the asset, liability, forecasted transaction, cash flow, or net investment that has been designated as the hedged item, and evaluates whether the derivative instrument is expected to reduce the risks associated with the hedged item. To the extent these criteria are not met, the Company does not use hedge accounting for the derivative. The changes in the fair value of a derivative not deemed to be a hedge are recorded currently in earnings. The Company does not hold or engage in transactions involving derivative instruments for purposes other than risk management.
ASC 815, “Derivatives and Hedging,” requires that all derivatives be recognized on the balance sheet at fair value. For derivatives designated as cash flow hedges, the related gains or losses on these contracts are deferred as a component of accumulated other comprehensive items. These deferred gains and losses are recognized in the period in which the underlying anticipated transaction occurs. For derivatives designated as fair value hedges, the unrealized gains and losses resulting from the impact of currency exchange rate movements are recognized in earnings in the period in which the exchange rates change and offset the currency gains and losses on the underlying exposures being hedged. The Company performs an evaluation of the effectiveness of the hedge both at inception and on an ongoing basis. The ineffective portion of a hedge, if any, and changes in the fair value of a derivative not deemed to be a hedge, are recorded in the condensed consolidated statement of operations.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
|
13.
|
Derivatives (continued)
|
Interest Rate Swaps
The Company entered into interest rate swap agreements in 2008 and 2006 to hedge its exposure to variable-rate debt and has designated these agreements as cash flow hedges. On February 13, 2008, the Company entered into a swap agreement (2008 Swap Agreement) to hedge the exposure to movements in the three-month LIBOR rate on future outstanding debt. The 2008 Swap Agreement has a five-year term and a $15,000,000 notional value, which decreases to $10,000,000 on December 31, 2010, and $5,000,000 on December 30, 2011. Under the 2008 Swap Agreement, on a quarterly basis the Company receives a three-month LIBOR rate and pays a fixed rate of interest of 3.265% plus the applicable margin. The Company entered into a swap agreement in 2006 (the 2006 Swap Agreement) to convert a portion of the Company’s outstanding debt from a floating to a fixed rate of interest. The swap agreement has the same terms and quarterly payment dates as the corresponding debt, and reduces proportionately in line with the amortization of the debt. Under the 2006 Swap Agreement, the Company receives a three-month LIBOR rate and pays a fixed rate of interest of 5.63%. The fair values for these instruments as of October 2, 2010 are included in other liabilities, with an offset to accumulated other comprehensive items (net of tax) in the accompanying condensed consolidated balance sheet. The Company has structured these interest rate swap agreements to be 100% effective and as a result, there is no current impact to earnings resulting from hedge ineffectiveness. Management believes that any credit risk associated with the swap agreements is remote based on the Company’s financial position and the creditworthiness of the financial institution issuing the swap agreements.
The counterparty to the swap agreements could demand an early termination of the swap agreements if the Company is in default under the 2008 Credit Agreement, or any agreement that amends or replaces the 2008 Credit Agreement in which the counterparty is a member, and the Company is unable to cure the default. An event of default under the 2008 Credit Agreement includes customary events of default and failure to comply with financial covenants, including a maximum consolidated leverage ratio of 3.5 and a minimum consolidated fixed charge coverage ratio of 1.2. As of October 2, 2010, the Company was in compliance with these covenants. The unrealized loss of $1,988,000 as of October 2, 2010 represents the estimated amount that the Company would pay to the counterparty in the event of an early termination.
Forward Currency-Exchange Contracts
The Company uses forward currency-exchange contracts primarily to hedge exposures resulting from fluctuations in currency exchange rates. Such exposures result primarily from portions of the Company’s operations and assets and liabilities that are denominated in currencies other than the functional currencies of the businesses conducting the operations or holding the assets and liabilities. The Company typically manages its level of exposure to the risk of currency-exchange fluctuations by hedging a portion of its currency exposures anticipated over the ensuing 12-month period using forward currency-exchange contracts that have maturities of 12 months or less.
Forward currency-exchange contracts that hedge forecasted accounts receivable or accounts payable are designated as cash flow hedges. The fair values for these instruments are included in other current assets for unrecognized gains and in other current liabilities for unrecognized losses, with an offset in accumulated other comprehensive items (net of tax). For forward currency-exchange contracts that are designated as fair value hedges, the gain or loss on the derivative, as well as the offsetting loss or gain on the hedged item are recognized currently in earnings. The fair values of forward currency-exchange contracts that are not designated as hedges are recorded currently in earnings. The Company recognized a gain of $44,000 and a loss of $32,000 in the third quarters of 2010 and 2009, respectively, and a gain of $14,000 and a loss of $582,000 in the first nine months of 2010 and 2009, respectively, associated with forward currency-exchange contracts that were not designated as hedges. These gains and losses are included in selling, general, and administrative expenses in the accompanying statement of operations. Management believes that any credit risk associated with forward currency-exchange contracts is remote based on the Company’s financial position and the creditworthiness of the financial institutions issuing the contracts.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
13. Derivatives (continued)
The following table summarizes the fair value of the Company’s derivative instruments designated and not designated as hedging instruments and the location of these instruments in the consolidated balance sheet:
|
(In thousands)
|
Balance Sheet Location
|
|
October 2, 2010
Asset (Liability) (a)
|
|
|
January 2, 2010
Asset (Liability)
|
|
| |
|
|
|
|
|
|
|
|
Derivatives Designated as Hedging Instruments:
|
|
|
|
|
|
|
|
|
Derivatives in an Asset Position:
|
|
|
|
|
|
|
|
|
Forward currency-exchange contracts
|
Other Current Assets
|
|
$ |
218 |
|
|
$ |
207 |
|
|
Derivatives in a Liability Position:
|
|
|
|
|
|
|
|
|
|
|
Forward currency-exchange contracts
|
Other Current Liabilities
|
|
$ |
(60 |
) |
|
$ |
– |
|
|
Interest rate swap agreements
|
Other Long-Term Liabilities
|
|
$ |
(1,988 |
) |
|
$ |
(1,517 |
) |
| |
|
|
Derivatives Not Designated as Hedging Instruments:
|
|
|
Derivatives in an Asset Position:
|
|
|
|
|
|
|
|
|
|
|
Forward currency-exchange contracts
|
Other Current Assets (Liabilities)
|
|
$ |
44 |
|
|
$ |
(98 |
) |
| |
|
|
|
|
|
|
|
|
|
|
(a)
|
See Note 14 for the fair value measurements relating to these financial instruments.
|
As of October 2, 2010, the total notional amounts of the Company’s interest rate swap agreements and forward currency-exchange contracts were $22,875,000 and $6,024,000, respectively. The 2006 and 2008 Swap Agreements were outstanding for the first nine months of 2010 and represent all of the interest rate swap agreement activity for the period. The terms of the Company’s forward currency-exchange contracts typically range from one to twelve months. The notional amount of the forward currency-exchange contracts outstanding at the end of the period is indicative of the level of activity during the first nine months of 2010.
The following table summarizes the activity in accumulated other comprehensive items (OCI) associated with the Company’s derivative instruments designated as cash flow hedges as of and for the period ended October 2, 2010:
|
(In thousands)
|
|
Interest Rate
Swap Agreements
|
|
|
Forward
Currency-Exchange Contracts
|
|
|
Total
|
|
|
Unrealized Loss (Gain), net of tax, at January 2, 2010
|
|
$ |
1,212 |
|
|
$ |
(138 |
) |
|
$ |
1,074 |
|
|
Loss Reclassified to Earnings (a)
|
|
|
(558 |
) |
|
|
(172 |
) |
|
|
(730 |
) |
|
Loss Recognized in OCI
|
|
|
1,029 |
|
|
|
201 |
|
|
|
1,230 |
|
|
Unrealized Loss (Gain), net of tax, at October 2, 2010
|
|
$ |
1,683 |
|
|
$ |
(109 |
) |
|
$ |
1,574 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) Included in interest expense for interest rate swap agreements and in revenues for forward currency-exchange contracts in the accompanying condensed consolidated statement of operations.
|
|
As of October 2, 2010, $619,000 of the net unrealized loss included in OCI is expected to be reclassified to earnings over the next twelve months.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
|
14.
|
Fair Value Measurements
|
Fair value measurement is defined as the price that would be received to sell an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. A fair value hierarchy is established, which prioritizes the inputs used in measuring fair value into three broad levels as follows:
|
|
•
|
Level 1—Quoted prices in active markets for identical assets or liabilities.
|
|
|
•
|
Level 2—Inputs, other than the quoted prices in active markets, that are observable either directly or indirectly.
|
|
|
•
|
Level 3—Unobservable inputs based on the Company’s own assumptions.
|
The following table presents the fair value hierarchy for those assets and liabilities measured at fair value on a recurring basis:
| |
|
Fair Value as of October 2, 2010
|
|
|
(In thousands)
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forward currency-exchange contracts
|
|
$ |
– |
|
|
$ |
262 |
|
|
$ |
– |
|
|
$ |
262 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forward currency-exchange contracts
|
|
$ |
– |
|
|
$ |
60 |
|
|
$ |
– |
|
|
$ |
60 |
|
|
Interest rate swap agreements
|
|
$ |
– |
|
|
$ |
1,988 |
|
|
$ |
– |
|
|
$ |
1,988 |
|
| |
|
|
|
| |
|
Fair Value as of January 2, 2010
|
|
|
(In thousands)
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forward currency-exchange contracts
|
|
$ |
– |
|
|
$ |
207 |
|
|
$ |
– |
|
|
$ |
207 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forward currency-exchange contracts
|
|
$ |
– |
|
|
$ |
98 |
|
|
$ |
– |
|
|
$ |
98 |
|
|
Interest rate swap agreements
|
|
$ |
– |
|
|
$ |
1,517 |
|
|
$ |
– |
|
|
$ |
1,517 |
|
The Company uses the market approach technique to value its financial assets and liabilities, and there were no changes in valuation techniques during the first nine months of 2010. The Company’s financial assets and liabilities carried at fair value comprise derivative instruments used to hedge the Company’s foreign currency and interest rate risks. The fair values of the Company’s interest rate swap agreements are based on LIBOR yield curves at the reporting date. The fair values of the Company’s forward currency-exchange contracts are based on quoted forward foreign exchange rates at the reporting date. The forward currency-exchange contracts and interest rate swap agreements are hedges of either recorded assets or liabilities or anticipated transactions. Changes in values of the underlying hedged assets and liabilities or anticipated transactions are not reflected in the table above.
The carrying amounts of long-term debt obligations approximate fair value as the obligations bear variable rates of interest, which adjust quarterly based on prevailing market rates.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Certain of the Company’s contracts, particularly for stock-preparation and systems orders, require the Company to provide a standby letter of credit to a customer as beneficiary, limited in amount to a negotiated percentage of the total contract value, in order to guarantee warranty and performance obligations of the Company under the contract. Typically, these standby letters of credit expire without being drawn by the beneficiary. In 2009, one of the Company’s largest Chinese customers indicated its intention to draw upon all outstanding standby letters of credit issued to the customer as beneficiary to secure warranty and performance obligations under multiple contracts. The Company believes the attempted draws by the customer are for reasons unrelated to the Company’s warranty and performance obligations and the Company has opposed, and intends to continue to vigorously oppose, such actions. As of October 2, 2010, the outstanding letters of credit to this customer totaled $1,552,000. In addition, the Company has obtained permanent injunctions against payment to the customer with respect to letters of credit totaling $4,272,000, which extinguished these letters of credit. There is no assurance that the Company will be successful in opposing this customer’s attempts to draw against the outstanding letters of credit and, if the Company were unsuccessful, it would incur an expense associated with such payments to the customer, which would adversely affect the Company’s results of operations.
The Company was named as a co-defendant in seven state class action complaints filed on behalf of individuals who own GeoDeck™ decking or railing products manufactured by Composites LLC between April 2002 and October 2003, as previously disclosed in the Company’s Annual Report on Form 10-K for the fiscal year ended January 2, 2010. The parties to the litigation voluntarily dismissed without prejudice all of the state class actions, subject to a tolling agreement that has been extended to November 30, 2010, while the parties pursue potential alternative dispute resolution or other settlement of these matters. There can be no assurance that the parties to the state court matters will reach a resolution on terms satisfactory to the parties, or that the plaintiffs will not file new complaints in the named states or other states, following the expiration of the tolling period. The Company has not made an accrual related to this litigation as it believes that an adverse outcome is not probable and estimable at this time.
|
17.
|
Recent Accounting Pronouncements
|
In September 2009, the FASB issued Accounting Standards Update (ASU) 2009-13, “Multiple-Deliverable Revenue Arrangements,” which amends the multiple-element arrangement guidance under ASC 605, “Revenue Recognition.” This guidance amends the criteria for separating consideration for products or services in multiple-deliverable arrangements. It establishes a selling price hierarchy for determining the selling price of a deliverable, eliminates the residual method of allocation, and requires that arrangement consideration be allocated at the inception of the arrangement to all deliverables using the relative selling price method. In addition, it significantly expands required disclosures related to a vendor’s multiple-deliverable revenue arrangements. This guidance is effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010 (fiscal 2011). The Company is currently evaluating the provisions of this guidance, but does not anticipate that it will have a material effect on its consolidated financial statements.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
|
18.
|
Discontinued Operation
|
In 2005, Composites LLC sold substantially all of its assets to LDI Composites Co. Under the terms of the asset purchase agreement, Composites LLC retained certain liabilities associated with the operation of the business prior to the sale, including the warranty obligations associated with products manufactured prior to the sale date. Composites LLC retained all of the cash proceeds received from the asset sale and continued to administer and pay warranty claims from the sale proceeds into the third quarter of 2007. On September 30, 2007, Composites LLC announced that it no longer had sufficient funds to honor warranty claims, was unable to pay or process warranty claims, and ceased doing business. All activity related to this business is classified in the results of the discontinued operation in the accompanying condensed consolidated financial statements.
Through the sale date of October 21, 2005, Composites LLC offered a standard limited warranty to the owner of its decking and roofing products, limited to repair or replacement of the defective product or a refund of the original purchase price. Composites LLC records the minimum amount of the potential range of loss for products under warranty. As of October 2, 2010, the accrued warranty costs associated with the composites business were $2,142,000, which represents the low end of the estimated range of warranty reserve required based on the level of claims received before the subsidiary ceased operations and judgments entered against it in litigation. Composites LLC has calculated that the total potential warranty cost ranges from $2,142,000 to approximately $13,100,000. The high end of the range represents the estimated maximum level of warranty claims remaining based on the total sales of the products under warranty. Composites LLC will continue to record adjustments to the accrued warranty costs to reflect the minimum amount of the potential range of loss for products under warranty based on judgments entered against it in litigation, if any.
See Note 16 for information related to pending litigation associated with the composites business.
Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations
This Quarterly Report on Form 10-Q includes forward-looking statements that are not statements of historical fact, and may include statements regarding possible or assumed future results of operations. Forward-looking statements are subject to risks and uncertainties and are based on the beliefs and assumptions of our management, using information currently available to our management. When we use words such as “believes,” "expects,"
“anticipates,” “intends,” “plans,” “estimates,” “should,” “likely,” “will,” “would,” or similar expressions, we are making forward-looking statements.
Forward-looking statements are not guarantees of performance. They involve risks, uncertainties, and assumptions. Our future results of operations may differ materially from those expressed in the forward-looking statements. Many of the important factors that will determine these results and values are beyond our ability to control or predict. You should not put undue reliance on any forward-looking statements. We undertake no obligation to publicly update any forward-looking statement, whether as a result of new information, future events, or otherwise. For a discussion of important factors that may cause our actual results to differ materially from those suggested by the forward-looking statements, you should read carefully the section captioned “Risk Factors” in Part II, Item 1A, of this Report.
Overview
Company Background
We are a leading supplier of equipment used in the global papermaking and paper recycling industries and are also a manufacturer of granules made from papermaking byproducts. Our continuing operations are comprised of one reportable operating segment: Pulp and Papermaking Systems (Papermaking Systems), and a separate product line, Fiber-based Products, reported in Other Business. Through our Papermaking Systems segment, we develop, manufacture, and market a range of equipment and products for the global papermaking and paper recycling industries. We have a large customer base that includes most of the world’s major paper manufacturers. We believe our large installed base provides us with a spare parts and consumables business that yields higher margins than our capital equipment business.
Through our Fiber-based Products business, we manufacture and sell granules derived from pulp fiber for use as carriers for agricultural, home lawn and garden, and professional lawn, turf and ornamental applications, as well as for oil and grease absorption.
Papermaking Systems Segment
Our Papermaking Systems segment designs and manufactures stock-preparation systems and equipment, fluid-handling systems and equipment, paper machine accessory equipment, and water-management systems primarily for the paper and paper recycling industries. Our principal products include:
|
|
-
|
Stock-preparation systems and equipment: custom-engineered systems and equipment, as well as standard individual components, for pulping, de-inking, screening, cleaning, and refining recycled and virgin fibers for preparation for entry into the paper machine during the production of recycled paper;
|
|
|
-
|
Fluid handling systems and equipment: rotary joints, precision unions, steam and condensate systems, components, and controls used primarily in the dryer section of the papermaking process and during the production of corrugated boxboard, metals, plastics, rubber, textiles and food;
|
|
|
-
|
Paper machine accessory equipment: doctoring systems and related consumables that continuously clean papermaking rolls to keep paper machines running efficiently; doctor blades made of a variety of materials to perform functions
|
|
|
including cleaning, creping, web removal, and application of coatings; and profiling systems that control moisture, web curl, and gloss during paper production; and
|
|
|
-
|
Water-management systems: systems and equipment used to continuously clean paper machine fabrics, drain water from pulp mixtures, form the sheet or web, and filter the process water for reuse.
|
Overview (continued)
Other Business
Our other business consists of our Fiber-based Products business that produces biodegradable, absorbent granules from papermaking byproducts for use primarily as carriers for agricultural, home lawn and garden, and professional lawn, turf and ornamental applications, as well as for oil and grease absorption.
Discontinued Operation
In 2005, our Kadant Composites LLC subsidiary (Composites LLC) sold substantially all of its assets to LDI Composites Co. Under the terms of the asset purchase agreement, Composites LLC retained certain liabilities associated with the operation of the business prior to the sale, including the warranty obligations associated with products manufactured prior to the sale date. Composites LLC retained all of the cash proceeds received from the asset sale and continued to administer and pay warranty claims from the sale proceeds into the third quarter of 2007. On September 30, 2007, Composites LLC announced that it no longer had sufficient funds to honor warranty claims, was unable to pay or process warranty claims, and ceased doing business.
All activity related to this business is classified in the results of the discontinued operation in the accompanying condensed consolidated financial statements.
Composites LLC’s inability to pay or process warranty claims has exposed us to greater risks associated with litigation. For more information regarding our current litigation arising from these claims, see Part II, Item 1, “Legal Proceedings,” and Part II, Item 1A, “Risk Factors.”
International Sales
During the first nine months of 2010 and 2009, approximately 57% and 60%, respectively, of our sales were to customers outside the United States, principally in Europe and Asia. 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 (GAAP). The preparation of these condensed consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of our condensed consolidated financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results may differ from these estimates under different assumptions or conditions.
Critical accounting policies are defined as those that reflect significant judgments and uncertainties, and could potentially result in materially different results under different assumptions and conditions. We believe that our most critical accounting policies, upon which our financial condition depends and which involve the most complex or subjective decisions or assessments, are those described in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” under the section captioned “Application of Critical Accounting Policies and Estimates” in Part I, Item 7, of our Annual Report on Form 10-K for the fiscal year ended January 2, 2010, filed with the Securities and Exchange Commission (SEC). There have been no material changes to these critical accounting policies since fiscal year-end 2009 that warrant disclosure.
Overview (continued)
Industry and Business Outlook
Our products are primarily sold to the global pulp and paper industry. While mill operating rates remained high in the third quarter of 2010 across most grades of paper, demand in the third quarter of 2010 for some paper and board grades began to show signs of weakening. Revenues in the third quarter of 2010 decreased $2.6 million, or 4%, sequentially, primarily due to a decrease in demand for our capital products in North America. In developing countries, particularly China, we continue to see growth potential as paper machine operating rates have remained high and several paper manufacturers have recently announced capacity additions. Revenues in China in the third quarter of 2010 increased $2.4 million, or 28%, sequentially. While we anticipate strong bookings in China in the fourth quarter of 2010, our revenue trends will continue to be affected by the timing of orders and other factors, such as customer-requested delivery dates and progress payments.
We continue to benefit from the numerous steps we have undertaken since the end of 2008 to optimize our business structure and maximize internal efficiencies, which include integrating multiple operations in a region, merging our sales teams in certain markets, and reducing the number of employees in certain locations. We are currently concentrating our efforts on several initiatives intended to improve our operating results, including focusing on higher-growth emerging markets, further penetrating existing markets where we see opportunity, increasing aftermarket and consumables sales, and expanding our use of low-cost manufacturing bases in locations such as China and Mexico. We also continue to focus our efforts on managing our operating costs, capital expenditures, and working capital.
We expect sequentially stronger capital bookings in the fourth quarter of 2010, but these expected bookings will not materially affect revenues in the fourth quarter due to the anticipated shipment dates. In addition, we anticipate some decline in gross margins from the previous three quarters, due to a higher proportion of lower-margin capital business. For the fourth quarter of 2010, we expect to report diluted earnings per share of $.26 to $.28 from continuing operations, on revenues of $64 to $66 million. For 2010, we expect to achieve diluted earnings per share of $1.33 to $1.35 from continuing operations, revised from our previous estimate of $1.20 to $1.25, on revenues of $261 to $263 million, revised from our previous estimate of $255 to $260 million.
Results of Operations
Third Quarter 2010 Compared With Third Quarter 2009
The following table sets forth our unaudited condensed consolidated statement of operations expressed as a percentage of total revenues from continuing operations for the third fiscal quarters of 2010 and 2009. The results of operations for the fiscal quarter ended October 2, 2010 are not necessarily indicative of the results to be expected for the full fiscal year.
| |
|
Three Months Ended
|
|
| |
|
October 2,
|
|
|
October 3,
|
|
| |
|
2010
|
|
|
2009
|
|
| |
|
|
|
|
|
|
|
Revenues
|
|
|
100 |
% |
|
|
100 |
% |
| |
|
|
|
|
|
|
|
|
|
Costs and Operating Expenses:
|
|
|
|
|
|
|
|
|
|
Cost of revenues
|
|
|
56 |
|
|
|
59 |
|
|
Selling, general, and administrative expenses
|
|
|
34 |
|
|
|
36 |
|
|
Research and development expenses
|
|
|
2 |
|
|
|
2 |
|
|
Restructuring costs and other income, net
|
|
|
(1 |
) |
|
|
1 |
|
| |
|
|
91 |
|
|
|
98 |
|
| |
|
|
|
|
|
|
|
|
|
Operating Income
|
|
|
9 |
|
|
|
2 |
|
| |
|
|
|
|
|
|
|
|
|
Interest Expense
|
|
|
– |
|
|
|
(1 |
) |
| |
|
|
|
|
|
|
|
|
|
Income from Continuing Operations Before Provision for Income Taxes
|
|
|
9 |
|
|
|
1 |
|
|
Provision for Income Taxes
|
|
|
2 |
|
|
|
1 |
|
| |
|
|
|
|
|
|
|
|
|
Income (Loss) from Continuing Operations
|
|
|
7 |
% |
|
|
– |
% |
Results of Operations (continued)
Revenues
Revenues increased $12.8 million, or 24%, to $66.5 million in the third quarter of 2010 from $53.7 million in the third quarter of 2009. Revenues in the third quarter of 2010 include a $1.6 million decrease from the unfavorable effects of currency translation. Excluding the effects of currency translation, revenues increased $14.4 million, or 27%, in the third quarter of 2010 due to an increase in revenues in our Papermaking Systems segment’s fluid-handling and stock-preparation equipment product lines. Excluding the effects of currency translation, revenues in our fluid-handling product line increased $6.3 million, or 40%, and revenues in our stock-preparation equipment product line increased $5.0 million, or 25%.
Revenues for the third quarters of 2010 and 2009 from our Papermaking Systems segment and our other business are as follows:
| |
|
Three Months Ended
|
|
| |
|
October 2,
|
|
|
October 3,
|
|
|
(In thousands)
|
|
2010
|
|
|
2009
|
|
| |
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
Papermaking Systems
|
|
$ |
65,269 |
|
|
$ |
52,356 |
|
|
Other Business
|
|
|
1,247 |
|
|
|
1,360 |
|
| |
|
$ |
66,516 |
|
|
$ |
53,716 |
|
Papermaking Systems Segment. Revenues at the Papermaking Systems segment increased $12.9 million, or 25%, to $65.3 million in the third quarter of 2010 from $52.4 million in the third quarter of 2009. Revenues in the 2010 period include a $1.6 million, or 3%, decrease from the unfavorable effects of currency translation.
Other Business. Revenues from the Fiber-based Products business decreased $0.2 million, or 8%, to $1.2 million in the third quarter of 2010 from $1.4 million in the third quarter of 2009.
The following table presents revenues at the Papermaking Systems segment by product line, the changes in revenues by product line between the third quarters of 2010 and 2009, and the changes in revenues by product line between the third quarters of 2010 and 2009 excluding the effect of currency translation. The increase excluding the effect of currency translation represents the increase resulting from the conversion of the current period amounts in local currency translated into U.S. dollars using the prior period exchange rates compared to the prior period amounts in U.S. dollars. The presentation of the changes in revenues by product line excluding the effect of currency translation is a non-GAAP measure. We believe this non-GAAP measure helps investors gain a better understanding of our underlying operations, consistent with how our management measures and forecasts our performance, especially when comparing such results to prior periods. This non-GAAP measure should not be considered superior to or a substitute for the corresponding GAAP measure.
| |
|
Three Months Ended
|
|
|
Increase
Excluding
Effect of
|
|
|
(In millions)
|
|
October 2,
2010
|
|
|
October 3,
2009
|
|
|
Increase
|
|
|
Currency
Translation
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Product Line:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-Preparation Equipment
|
|
$ |
23.9 |
|
|
$ |
19.7 |
|
|
$ |
4.2 |
|
|
$ |
5.0 |
|
|
Fluid-Handling
|
|
|
21.6 |
|
|
|
15.8 |
|
|
|
5.8 |
|
|
|
6.3 |
|
|
Accessories
|
|
|
12.3 |
|
|
|
11.9 |
|
|
|
0.4 |
|
|
|
0.6 |
|
|
Water-Management
|
|
|
6.9 |
|
|
|
4.5 |
|
|
|
2.4 |
|
|
|
2.5 |
|
|
Other
|
|
|
0.6 |
|
|
|
0.5 |
|
|
|
0.1 |
|
|
|
0.1 |
|
| |
|
$ |
65.3 |
|
|
$ |
52.4 |
|
|
$ |
12.9 |
|
|
$ |
14.5 |
|
Results of Operations (continued)
Revenues from the Papermaking Systems segment’s stock-preparation equipment product line increased $4.2 million, or 21%, in the third quarter of 2010 compared to the third quarter of 2009, including a $0.8 million, or 4%, decrease from the unfavorable effect of currency translation. Excluding the effect of currency translation, revenues from the segment’s stock-preparation equipment product line increased $5.0 million, or 25%, due to an increase in revenues in all our geographic regions. The increases in North America and China were principally driven by higher demand for our capital products, while the increase in Europe was due to higher demand for both capital and aftermarket products. Revenues from the stock-preparation equipment product line decreased $1.1 million, or 5%, sequentially, due to the decrease in demand for capital products and the timing of orders. Revenues in this product line, especially for capital products, will continue to be impacted by the timing of product shipments. We expect to see an increase in bookings in the fourth quarter, but the associated revenues will not be recognized until the products ship in 2011.
Revenues from the segment’s fluid-handling product line increased $5.8 million, or 37%, in the third quarter of 2010 compared to the third quarter of 2009, including a $0.5 million, or 3%, decrease from the unfavorable effect of currency translation. Excluding the effect of currency translation, revenues from the segment’s fluid-handling product line increased $6.3 million, or 40%, primarily due to increased demand for our products in Europe and, to a lesser extent, China and North America. Revenues from the fluid-handling product line increased $1.5 million, or 8%, sequentially, due to increases in all of our major geographic regions, except for North America.
Revenues from the segment’s accessories product line increased $0.4 million, or 3%, in the third quarter of 2010 primarily due to increased demand in North America for our capital and, to a lesser extent, aftermarket products.
Revenues from the segment’s water-management product line increased $2.4 million, or 54%, in the third quarter of 2010 compared to the third quarter of 2009 primarily due to increased demand in North America and Europe for our capital products.
Gross Profit Margin
Gross profit margins for the third quarters of 2010 and 2009 are as follows:
| |
|
Three Months Ended
|
|
| |
|
October 2,
|
|
|
October 3,
|
|
| |
|
2010
|
|
|
2009
|
|
| |
|
|
|
|
|
|
|
Gross Profit Margin:
|
|
|
|
|
|
|
|
Papermaking Systems
|
|
|
44 |
% |
|
|
41 |
% |
|
Other Business
|
|
|
28 |
|
|
|
25 |
|
| |
|
|
44 |
% |
|
|
41 |
% |
Gross profit margin increased to 44% in the third quarter of 2010 from 41% in the third quarter of 2009 primarily due to improved margins in our Papermaking Systems segment.
Papermaking Systems Segment. The gross profit margin in the Papermaking Systems segment increased to 44% in the third quarter of 2010 from 41% in the third quarter of 2009. The improvement in gross margins was primarily due to better absorption and cost efficiencies in our worldwide manufacturing operations, reflecting the higher volumes and the significant cost reduction efforts we have undertaken since the end of 2008. These increases in product gross margins were partly offset by an unfavorable product mix in the third quarter of 2010 compared to the third quarter of 2009. We expect gross margin percentages to decline in the fourth quarter of 2010 as lower-margin capital projects comprise a higher percentage of revenues.
Other Business. The gross profit margin in our Fiber-based Products business increased to 28% in the third quarter of 2010 from 25% in the third quarter of 2009 primarily due to the lower cost of natural gas used in the manufacturing process.
Results of Operations (continued)
Operating Expenses
Selling, general, and administrative expenses as a percentage of revenues decreased to 34% in the third quarter of 2010 from 36% in the third quarter of 2009 due to improved operating leverage related to higher revenues in 2010 compared to the 2009 period. Selling, general, and administrative expenses increased $2.9 million, or 15%, to $22.5 million in the third quarter of 2010 from $19.6 million in the third quarter of 2009. This increase was primarily due to higher incentive and commission expenses associated with improved operating performance and higher revenues in the third quarter of 2010 compared to the 2009 period. This increase also included a $0.5 million decrease from the favorable effect of foreign currency translation and a $0.3 million increase due to acquisition expenses.
Total stock-based compensation expense was $0.7 million in both the third quarters of 2010 and 2009 and is included in selling, general, and administrative expenses in the accompanying condensed consolidated statement of operations. As of October 2, 2010, unrecognized compensation cost related to stock-based compensation was approximately $3.3 million, which will be recognized over a weighted average period of 1.9 years.
Research and development expenses increased $0.2 million, or 25%, to $1.3 million in the third quarter of 2010 compared to $1.1 million in the third quarter of 2009.
Restructuring Costs and Other Income, Net
Restructuring costs and other income, net was $0.7 million of income and $0.5 million of expense in the third quarters of 2010 and 2009, respectively. We recognized a gain on the sale of real estate in the U.S. of $0.7 million in the third quarter of 2010. Restructuring costs in the third quarter of 2009 consisted of severance and associated charges of $0.3 million related to the consolidation of our water-management manufacturing facility in New York into our facilities in Massachusetts and Mexico and $0.2 million related to the reduction of 6 full-time positions in Canada and France. All of these items occurred in the Papermaking Systems segment.
Interest Income
Interest income increased to $54 thousand in the third quarter of 2010 from $49 thousand in the third quarter of 2009 due to higher average invested balances offset in part by lower average interest rates.
Interest Expense
Interest expense decreased $0.2 million, or 34%, to $0.3 million in the third quarter of 2010 from $0.5 million in the third quarter of 2009 primarily due to lower average interest rates and, to a lesser extent, lower average outstanding borrowings in the third quarter of 2010 compared to the third quarter of 2009.
Provision for Income Taxes
Our provision for income taxes was $1.4 million, or 23.8%, and $0.5 million, or 137.0%, of pre-tax income in the third quarters of 2010 and 2009, respectively. The effective tax rate of 23.8% in the third quarter of 2010 was lower than our statutory rate primarily due to a favorable geographical distribution of earnings and the expected release of valuation allowances associated with the expected utilization in 2010 of various deferred tax assets that had been fully reserved in prior periods. The effective tax rate of 137.0% in the third quarter of 2009 is primarily due to the tax impact of the full valuation allowance we established for certain U.S. deferred tax assets as a result of our accumulated loss position in the U.S. and the uncertainty of profitability in future periods. We expect our effective tax rate to be approximately 23% in the fourth quarter of 2010 due to the anticipated profitability in the U.S. and certain foreign tax jurisdictions.
Income (Loss) from Continuing Operations
Income from continuing operations was $4.6 million in the third quarter of 2010 compared to a loss from continuing operations of $0.1 million in the third quarter of 2009. The increase in the 2010 period was primarily due to an increase in operating income of $5.4 million (see Revenues, Gross Profit Margin, and Operating Expenses discussed above).
Results of Operations (continued)
Loss from Discontinued Operation
Loss from the discontinued operation was $5 thousand in both the third quarters of 2010 and 2009.
Recent Accounting Pronouncements
In September 2009, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2009-13, “Multiple-Deliverable Revenue Arrangements,” which amends the multiple-element arrangement guidance under Accounting Standards Codification (ASC) 605, “Revenue Recognition.” This guidance amends the criteria for separating consideration for products or services in multiple-deliverable arrangements. It establishes a selling price hierarchy for determining the selling price of a deliverable, eliminates the residual method of allocation, and requires that arrangement consideration be allocated at the inception of the arrangement to all deliverables using the relative selling price method. In addition, it significantly expands required disclosures related to a vendor’s multiple-deliverable revenue arrangements. This guidance is effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010 (fiscal 2011). We are currently evaluating the provisions of this guidance, but do not anticipate that it will have a material effect on our consolidated financial statements.
First Nine Months 2010 Compared With First Nine Months 2009
The following table sets forth our unaudited condensed consolidated statement of operations expressed as a percentage of total revenues from continuing operations for the first nine months of 2010 and 2009. The results of operations for the first nine months of 2010 are not necessarily indicative of the results to be expected for the full fiscal year.
| |
|
Nine Months Ended
|
|
| |
|
October 2,
|
|
|
October 3,
|
|
| |
|
2010
|
|
|
2009
|
|
| |
|
|
|
|
|
|
|
Revenues
|
|
|
100 |
% |
|
|
100 |
% |
| |
|
|
|
|
|
|
|
|
|
Costs and Operating Expenses:
|
|
|
|
|
|
|
|
|
|
Cost of revenues
|
|
|
56 |
|
|
|
60 |
|
|
Selling, general, and administrative expenses
|
|
|
34 |
|
|
|
36 |
|
|
Research and development expenses
|
|
|
2 |
|
|
|
3 |
|
|
Restructuring costs and other income, net
|
|
|
(1 |
) |
|
|
1 |
|
| |
|
|
91 |
|
|
|
100 |
|
| |
|
|
|
|
|
|
|
|
|
Operating Income (Loss)
|
|
|
9 |
|
|
|
– |
|
| |
|
|
|
|
|
|
|
|
|
Interest Expense
|
|
|
– |
|
|
|
(1 |
) |
| |
|
|
|
|
|
|
|
|
|
Income (Loss) from Continuing Operations Before Provision for Income Taxes
|
|
|
9 |
|
|
|
(1 |
) |
|
Provision for Income Taxes
|
|
|
2 |
|
|
|
2 |
|
| |
|
|
|
|
|
|
|
|
|
Income (Loss) from Continuing Operations
|
|
|
7 |
% |
|
|
(3 |
)% |
Revenues
Revenues increased $28.0 million, or 17%, to $196.8 million in the first nine months of 2010 from $168.8 million in the first nine months of 2009, including a $0.1 million increase from the favorable effects of currency translation. Excluding the effects of currency translation, revenues increased $14.5 million, or 31%, in our fluid-handling product line and $7.0 million, or 48%, in our water-management product line.
Results of Operations (continued)
Revenues for the first nine months of 2010 and 2009 from our Papermaking Systems segment and our other business are as follows:
| |
|
Nine Months Ended
|
|
| |
|
October 2,
|
|
|
October 3,
|
|
|
(In thousands)
|
|
2010
|
|
|
2009
|
|
| |
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
Papermaking Systems
|
|
$ |
189,691 |
|
|
$ |
162,338 |
|
|
Other Business
|
|
|
7,082 |
|
|
|
6,467 |
|
| |
|
$ |
196,773 |
|
|
$ |
168,805 |
|
Papermaking Systems Segment. Revenues at the Papermaking Systems segment increased $27.4 million, or 17%, to $189.7 million in the first nine months of 2010 from $162.3 million in the first nine months of 2009, including a $0.1 million increase from the favorable effects of currency translation.
Other Business. Revenues from our Fiber-based Products business increased $0.6 million, or 10%, to $7.1 million in the first nine months of 2010 from $6.5 million in the first nine months of 2009 due to higher sales of Biodac™, our line of biodegradable granular products.
The following table presents revenues at the Papermaking Systems segment by product line, the changes in revenues by product line between the first nine months of 2010 and 2009, and the changes in revenues by product line between the first nine months of 2010 and 2009 excluding the effect of currency translation. The increase excluding the effect of currency translation represents the increase resulting from the conversion of the current period amounts in local currency translated into U.S. dollars using the prior period exchange rates compared to the prior period amounts in U.S. dollars. The presentation of the changes in revenues by product line excluding the effect of currency translation is a non-GAAP measure. We believe this non-GAAP measure helps investors gain a better understanding of our underlying operations, consistent with how management measures and forecasts our performance, especially when comparing such results to prior periods. This non-GAAP measure should not be considered superior to or a substitute for the corresponding GAAP measure.
| |
|
Nine Months Ended
|
|
|
Increase
Excluding
Effect of
|
|
|
(In millions)
|
|
October 2,
2010
|
|
|
October 3,
2009
|
|
|
Increase
|
|
|