Kadant Inc. (NYSE: KAI) reported its financial results for the third quarter ended September 26, 2020.

Third Quarter 2020 Financial Highlights

  • Operating cash flow was $24 million and free cash flow was $23 million.
  • Bookings decreased 16% to $143 million.
  • Revenue decreased 11% to $155 million.
  • GAAP diluted EPS decreased 9% to $1.28.
  • Adjusted diluted EPS decreased 5% to $1.31.
  • Net income decreased 8% to $15 million.
  • Adjusted EBITDA decreased 7% to $30 million and represented 19.4% of revenue.

Note: Percent changes above are based on comparison to the prior year period. Free cash flow, adjusted diluted EPS, adjusted EBITDA, adjusted EBITDA margin, and changes in organic revenue are non-GAAP financial measures that exclude certain items as detailed later in this press release under the heading “Use of Non-GAAP Financial Measures.”

Management Commentary“Despite pandemic-related challenges, our revenue increased sequentially to $155 million in the third quarter and was stronger than expected driven by increased demand in our Industrial Processing and Flow Control segments," said Jeffrey L. Powell, president and chief executive officer of Kadant. "We had our highest quarterly adjusted diluted EPS for the year of $1.31, up 24 percent sequentially, due to excellent operational execution and contributions from government employee retention programs. We were particularly pleased with our cash flow from operations of $24 million and free cash flow of $23 million. We paid down $26 million in debt in the quarter, which combined with our adjusted EBITDA helped drive a reduction in our leverage ratio to 1.88.

“Our parts and consumables revenue increased six percent sequentially to $103 million in the third quarter, representing 66 percent of our third quarter revenue. We have seen an increase in demand for our parts and consumables following the curtailment in spending by our customers in the first half of the year.”

Third Quarter 2020 compared to 2019Revenue decreased 11 percent to $154.6 million compared to $173.5 million in 2019. Organic revenue was down 12 percent, which excludes an acquisition and an increase from the favorable effect of foreign currency translation. Gross margin was 44.2 percent compared to 42.8 percent in 2019.

GAAP diluted earnings per share (EPS) decreased nine percent to $1.28 compared to $1.41 in 2019. Adjusted diluted EPS decreased five percent to $1.31 compared to $1.38 in 2019. Adjusted diluted EPS in 2020 excludes $0.03 of restructuring costs, a $0.03 discrete tax benefit, $0.02 of acquired backlog amortization and $0.01 of acquisition costs. Adjusted diluted EPS in 2019 excludes a $0.02 discrete tax benefit. Adjusted EBITDA decreased seven percent to $30.0 million compared to $32.3 million in 2019. Cash flow from operations decreased five percent to $24.4 million compared to $25.7 million in 2019.

Bookings decreased 16 percent to $143.3 million compared to $170.9 million in 2019. Organic bookings were down 17 percent, which excludes an acquisition and an increase from the favorable effect of foreign currency translation.

Summary and Outlook“Capital projects are showing signs of increasing activity and we expect a solid sequential improvement in our capital bookings in the fourth quarter," Mr. Powell continued. "We also expect demand for our parts and consumables to remain stable as our customers perform year-end maintenance on their equipment. As our business continues to strengthen, we anticipate the benefits we receive from government employee retention programs, primarily in Canada and China, will be lower in the fourth quarter. Our global footprint and the diversity of our product offerings have provided stability as the timing of the market recovery has shown to vary by region and industry. While we have seen a recent strengthening in consumer demand, there is still uncertainty surrounding the timing of the recovery in markets around the world and as a result, we will not be providing guidance at this time.”

Conference Call Kadant will hold a webcast with a slide presentation for investors on Wednesday, October 28, 2020, at 11:00 a.m. eastern time to discuss its third quarter performance, as well as future expectations. To access the webcast, including the slideshow and accompanying audio, go to www.kadant.com and click on “Investors.” To listen to the webcast via teleconference, call 888-326-8410 within the U.S., or +1-704-385-4884 outside the U.S. and reference participant passcode 2649708. Prior to the call, our earnings release and the slides used in the webcast presentation will be filed with the Securities and Exchange Commission and will be available at www.sec.gov. An archive of the webcast presentation will be available on our website until November 27, 2020.

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

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

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

Revenue in the third quarter of 2020 included a $0.6 million favorable foreign currency translation effect and $0.8 million from an acquisition. Revenue in the first nine months of 2020 included a $5.9 million unfavorable foreign currency translation effect and $1.0 million from an acquisition. We present increases or decreases in organic revenue, which excludes the effect of acquisitions and foreign currency translation, to provide investors insight into underlying revenue trends.                                Our non-GAAP financial measures exclude restructuring costs, acquisition costs, amortization expense related to acquired profit in inventory and backlog, and discrete tax items. These items are excluded as they are not indicative of our core operating results and are not comparable to other periods, which have differing levels of incremental costs, or none at all.

Third QuarterAdjusted operating income, adjusted EBITDA, and adjusted EBITDA margin exclude:

  • Pre-tax acquisition costs of $0.1 million in 2020.
  • Pre-tax restructuring costs of $0.5 million in 2020.
  • Pre-tax expense related to acquired backlog amortization of $0.3 million in 2020.

Adjusted net income and adjusted diluted EPS exclude:

  • After-tax acquisition costs of $0.1 million in 2020.
  • After-tax restructuring costs of $0.3 million ($0.5 million net of tax of $0.2 million) in 2020.
  • After-tax expense related to acquired backlog amortization of $0.2 million ($0.3 million net of tax of $0.1 million) in 2020.
  • A discrete tax benefit of $0.3 million in both 2020 and 2019.

Free cash flow is calculated as cash flow from operations less:

  • Capital expenditures of $1.8 million in 2020 and $2.1 million in 2019.

First Nine MonthsAdjusted operating income, adjusted EBITDA, and adjusted EBITDA margin exclude:

  • Pre-tax acquisition costs of $0.5 million in 2020 and $0.8 million in 2019.
  • Pre-tax restructuring costs of $0.9 million in 2020.
  • Pre-tax expense related to acquired backlog amortization of $0.4 million in 2020 and $1.3 million in 2019.
  • Pre-tax expense related to amortization of acquired profit in inventory of $3.5 million in 2019.

Adjusted net income and adjusted diluted EPS exclude:

  • After-tax acquisition costs of $0.4 million ($0.5 million net of tax of $0.1 million) in 2020 and $0.7 million ($0.8 million net of tax of $0.1 million) in 2019.
  • After-tax restructuring costs of $0.7 million ($0.9 million net of tax of $0.2 million) in 2020.
  • After-tax expense related to acquired backlog amortization of $0.3 ($0.4 million net of tax of $0.1 million) in 2020 and $1.0 million ($1.3 million net of tax of $0.3 million) in 2019.
  • After-tax expense related to amortization of acquired profit in inventory of $2.7 million ($3.5 million net of tax of $0.8 million) in 2019.
  • A discrete tax benefit of $0.3 million in 2020 and $1.5 million in 2019.

Free cash flow is calculated as cash flow from operations less:

  • Capital expenditures of $5.4 million in 2020 and $6.2 million in 2019.

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

                       
Financial Highlights (unaudited)                      
(In thousands, except per share amounts and percentages)                      
                       
  Three Months Ended   Nine Months Ended
Consolidated Statement of Income Sept. 26,2020   Sept. 28,2019   Sept. 26,2020   Sept. 28,2019
Revenue $ 154,610     $ 173,504     $ 466,597     $ 521,985  
Costs and Operating Expenses:                      
Cost of revenue 86,294     99,257     263,510     302,852  
Selling, general, and administrative expenses 43,853     47,097     134,518     144,883  
Research and development expenses 2,658     2,597     8,532     7,980  
Restructuring costs 470         926      
  133,275     148,951     407,486     455,715  
Operating Income 21,335     24,553     59,111     66,270  
Interest Income 52     43     140     158  
Interest Expense (1,670 )   (3,066 )   (6,060 )   (10,143 )
Other Expense, Net (32 )   (98 )   (95 )   (296 )
Income Before Provision for Income Taxes 19,685     21,432     53,096     55,989  
Provision for Income Taxes 4,705     5,219     13,738     12,310  
Net Income 14,980     16,213     39,358     43,679  
Net Income Attributable to Noncontrolling Interest (129 )   (98 )   (369 )   (360 )
Net Income Attributable to Kadant $ 14,851     $ 16,115     $ 38,989     $ 43,319  
                       
Earnings per Share Attributable to Kadant:                      
Basic $ 1.29     $ 1.43     $ 3.40     $ 3.87  
Diluted $ 1.28     $ 1.41     $ 3.38     $ 3.79  
                       
Weighted Average Shares:                      
Basic 11,504     11,267     11,472     11,198  
Diluted 11,589     11,469     11,550     11,434  
                       
  Three Months Ended   Three Months Ended
Adjusted Net Income and Adjusted Diluted EPS (a) Sept. 26,2020   Sept. 26,2020   Sept. 28,2019   Sept. 28,2019
Net Income and Diluted EPS Attributable to Kadant, as Reported $ 14,851     $ 1.28     $ 16,115     $ 1.41  
Adjustments for the Following:                      
Restructuring Costs, Net of Tax 335     0.03          
Acquisition Costs, Net of Tax 58     0.01          
Amortization of Acquired Backlog, Net of Tax (e) 249     0.02     16      
Discrete Tax Items (338 )   (0.03 )   (264 )   (0.02 )
Adjusted Net Income and Adjusted Diluted EPS (a) $ 15,155     $ 1.31     $ 15,867     $ 1.38  
                       
  Nine Months Ended   Nine Months Ended
Adjusted Net Income and Adjusted Diluted EPS (a) Sept. 26,2020   Sept. 26,2020   Sept. 28,2019   Sept. 28,2019
Net Income and Diluted EPS Attributable to Kadant, as Reported $ 38,989     $ 3.38     $ 43,319     $ 3.79  
Adjustments for the Following:                      
Restructuring Costs, Net of Tax 667     0.06          
Acquisition Costs, Net of Tax 355     0.03     699     0.06  
Amortization of Acquired Profit in Inventory and Backlog, Net of Tax (e,f) 275     0.02     3,687     0.32  
Discrete Tax Items (338 )   (0.03 )   (1,499 )   (0.13 )
Adjusted Net Income and Adjusted Diluted EPS (a) $ 39,948     $ 3.46     $ 46,206     $ 4.04  
                       
  Three Months Ended             DecreaseExcluding  
Revenue by Segment (b) Sept. 26,2020   Sept. 28,2019   Decrease   Acquisitionand FX (a,c)
Flow Control $ 56,815     $ 62,375     $ (5,560 )   $ (5,300 )
Industrial Processing 62,086     74,229     (12,143 )   (13,306 )
Material Handling 35,709     36,900     (1,191 )   (1,689 )
  $ 154,610     $ 173,504     $ (18,894 )   $ (20,295 )
                       
Percentage of Parts and Consumables Revenue 66 %   61 %            
                       
  Nine Months Ended         DecreaseExcluding
  Sept. 26,2020   Sept. 28,2019   Decrease   Acquisitionand FX (a,c)
Flow Control $ 165,329     $ 188,792     $ (23,463 )   $ (19,769 )
Industrial Processing 192,468     222,899     (30,431 )   (29,375 )
Material Handling 108,800     110,294     (1,494 )   (1,316 )
  $ 466,597     $ 521,985     $ (55,388 )   $ (50,460 )
                       
Percentage of Parts and Consumables Revenue 65 %   63 %            
                       
  Three Months Ended         DecreaseExcluding
Bookings by Segment (b) Sept. 26,2020   Sept. 28,2019   Decrease   Acquisitionand FX (c)
Flow Control $ 49,608     $ 58,817     $ (9,209 )   $ (8,757 )
Industrial Processing 59,903     74,928     (15,025 )   (15,713 )
Material Handling 33,838     37,185     (3,347 )   (4,057 )
  $ 143,349     $ 170,930     $ (27,581 )   $ (28,527 )
                       
Percentage of Parts and Consumables Bookings 67 %   59 %            
                       
  Nine Months Ended       DecreaseExcluding
  Sept. 26,2020   Sept. 28,2019   Decrease   Acquisitionand FX (c)
Flow Control $ 166,713     $ 184,246     $ (17,533 )   $ (13,516 )
Industrial Processing 178,885     229,007     (50,122 )   (48,790 )
Material Handling 106,344     115,249     (8,905 )   (9,005 )
  $ 451,942     $ 528,502     $ (76,560 )   $ (71,311 )
                       
Percentage of Parts and Consumables Bookings 67 %   63 %            
                       
  Three Months Ended   Nine Months Ended
Business Segment Information (b) Sept. 26,2020   Sept. 28,2019   Sept. 26,2020   Sept. 28,2019
Gross Margin:                      
Flow Control 52.9 %   52.9 %   53.1 %   51.7 %
Industrial Processing 43.7 %   38.7 %   41.0 %   39.0 %
Material Handling 31.1 %   34.0 %   33.5 %   31.4 %
  44.2 %   42.8 %   43.5 %   42.0 %
Operating Income:              
Flow Control $ 13,770     $ 15,103     $ 37,360     $ 43,220  
Industrial Processing 12,072     13,107     32,147     38,830  
Material Handling 2,614     3,525     10,341     5,515  
Corporate (7,121 )   (7,182 )   (20,737 )   (21,295 )
  $ 21,335     $ 24,553     $ 59,111     $ 66,270  
               
Adjusted Operating Income (a,d):              
Flow Control $ 14,035     $ 15,103     $ 38,081     $ 43,220  
Industrial Processing 12,438     13,107     32,948     38,830  
Material Handling 2,862     3,546     10,597     11,210  
Corporate (7,121 )   (7,182 )   (20,737 )   (21,295 )
  $ 22,214     $ 24,574     $ 60,889     $ 71,965  
               
Capital Expenditures:              
Flow Control $ 509     $ 636     $ 1,667     $ 1,814  
Industrial Processing 785     1,053     2,460     3,223  
Material Handling 486     397     1,167     1,145  
Corporate 42     7     125     54  
  $ 1,822     $ 2,093     $ 5,419     $ 6,236  
               
  Three Months Ended   Nine Months Ended
Cash Flow and Other Data Sept. 26,2020   Sept. 28,2019   Sept. 26,2020   Sept. 28,2019
Cash Provided by Operations $ 24,393     $ 25,678     $ 52,601     $ 58,166  
Less: Capital Expenditures (1,822 )   (2,093 )   (5,419 )   (6,236 )
Free Cash Flow (a) $ 22,571     $ 23,585     $ 47,182     $ 51,930  
               
Depreciation and Amortization Expense $ 8,086     $ 7,763     $ 23,260     $ 24,304  
               
Balance Sheet Data         Sept. 26,2020   Dec. 28,2019
Assets              
Cash, Cash Equivalents, and Restricted Cash         $ 56,204     $ 68,273  
Accounts Receivable, net         94,145     95,740  
Inventories         108,715     102,715  
Unbilled Revenue         9,095     13,162  
Property, Plant, and Equipment, net         82,427     86,032  
Intangible Assets         164,359     173,896  
Goodwill         342,999     336,032  
Other Assets         55,947     63,537  
          $ 913,891     $ 939,387  
Liabilities and Stockholders' Equity              
Accounts Payable         $ 32,588     $ 45,852  
Debt Obligations         255,010     294,717  
Other Borrowings         5,577     6,308  
Other Liabilities         158,471     165,431  
Total Liabilities         451,646     512,308  
Stockholders' Equity         462,245     427,079  
          $ 913,891     $ 939,387  
               
  Three Months Ended   Nine Months Ended
Adjusted Operating Income and Adjusted EBITDA Reconciliation (a,b) Sept. 26,2020   Sept. 28,2019   Sept. 26,2020   Sept. 28,2019
Consolidated                      
Net Income Attributable to Kadant $ 14,851     $ 16,115     $ 38,989     $ 43,319  
Net Income Attributable to Noncontrolling Interest 129     98     369     360  
Provision for Income Taxes 4,705     5,219     13,738     12,310  
Interest Expense, Net 1,618     3,023     5,920     9,985  
Other Expense, Net 32     98     95     296  
Operating Income 21,335     24,553     59,111     66,270  
Restructuring Costs 470         926      
Acquisition Costs 78         485     843  
Acquired Backlog Amortization (e) 331     21     367     1,303  
Acquired Profit in Inventory (f)             3,549  
Adjusted Operating Income (a) 22,214     24,574     60,889     71,965  
Depreciation and Amortization 7,755     7,742     22,893     23,001  
Adjusted EBITDA (a) $ 29,969     $ 32,316     $ 83,782     $ 94,966  
                       
Adjusted EBITDA Margin (a,g) 19.4 %   18.6 %   18.0 %   18.2 %
                       
Flow Control                      
Operating Income $ 13,770     $ 15,103     $ 37,360     $ 43,220  
Restructuring Costs 265         721      
Adjusted Operating Income (a) 14,035     15,103     38,081     43,220  
Depreciation and Amortization 1,564     1,629     4,729     4,823  
Adjusted EBITDA (a) $ 15,599     $ 16,732     $ 42,810     $ 48,043  
                       
Adjusted EBITDA Margin (a,g) 27.5 %   26.8 %   25.9 %   25.4 %
                       
Industrial Processing                      
Operating Income $ 12,072     $ 13,107     $ 32,147     $ 38,830  
Restructuring Costs 205         205      
Acquisition Costs 78         485      
Acquired Backlog Amortization (e) 83         111      
Adjusted Operating Income (a) 12,438     13,107     32,948     38,830  
Depreciation and Amortization 3,311     3,249     9,598     9,731  
Adjusted EBITDA (a) $ 15,749     $ 16,356     $ 42,546     $ 48,561  
                       
Adjusted EBITDA Margin (a,g) 25.4 %   22.0 %   22.1 %   21.8 %
                       
Material Handling                      
Operating Income $ 2,614     $ 3,525     $ 10,341     $ 5,515  
Acquisition Costs             843  
Acquired Backlog Amortization (e) 248     21     256     1,303  
Acquired Profit in Inventory (f)             3,549  
Adjusted Operating Income (a) 2,862     3,546     10,597     11,210  
Depreciation and Amortization 2,824     2,801     8,416     8,259  
Adjusted EBITDA (a) $ 5,686     $ 6,347     $ 19,013     $ 19,469  
                       
Adjusted EBITDA Margin (a,g) 15.9 %   17.2 %   17.5 %   17.7 %
                       
Corporate                      
Operating Loss $ (7,121 )   $ (7,182 )   $ (20,737 )   $ (21,295 )
Depreciation and Amortization 56     63     150     188  
EBITDA (a) $ (7,065 )   $ (7,119 )   $ (20,587 )   $ (21,107 )
(a) Represents a non-GAAP financial measure.
 
(b) Reflects our new reportable operating segments announced on April 22, 2020. Prior period information has been recast to conform to the current period presentation.
 
(c) Represents the increase (decrease) resulting from the exclusion of an acquisition and from the conversion of current period amounts reported in local currencies into U.S. dollars at the exchange rate of the prior period compared to the U.S. dollar amount reported in the prior period.
 
(d) See reconciliation to the most directly comparable GAAP financial measure under "Adjusted Operating Income and Adjusted EBITDA Reconciliation."
 
(e) Represents intangible amortization expense associated with acquired backlog.
 
(f) Represents expense within cost of revenues associated with amortization of acquired profit in inventory.
 
(g) Calculated as adjusted EBITDA divided by revenue in each period.
   

About Kadant Kadant Inc. is a global supplier of high-value, critical components and engineered systems used in process industries worldwide. The Company’s products, technologies, and services play an integral role in enhancing process efficiency, optimizing energy utilization, and maximizing productivity in resource-intensive industries. Kadant is based in Westford, Massachusetts, with approximately 2,700 employees in 20 countries worldwide. For more information, visit www.kadant.com.

Safe Harbor StatementThe following constitutes a “Safe Harbor” statement under the Private Securities Litigation Reform Act of 1995: This press release contains forward-looking statements that involve a number of risks and uncertainties, including forward-looking statements about our future financial and operating performance, demand for our products, and economic and industry outlook. These forward-looking statements represent our expectations as of the date of this press release. We undertake no obligation to publicly update any forward-looking statement, whether as a result of new information, future events, or otherwise. These forward-looking statements are subject to known and unknown risks and uncertainties that may cause our actual results to differ materially from these forward-looking statements as a result of various important factors, including those set forth under the heading "Risk Factors" in Kadant’s annual report on Form 10-K for the year ended December 28, 2019 and subsequent filings with the Securities and Exchange Commission. These include risks and uncertainties relating to the impact of the COVID-19 pandemic on our operating and financial results; adverse changes in global and local economic conditions; the variability and difficulty in accurately predicting revenues from large capital equipment and systems projects; our customers’ ability to obtain financing for capital equipment projects; international sales and operations; health epidemics; changes to government regulations and policies around the world; policies of the Chinese government; the variability and uncertainties in sales of capital equipment in China; levels of residential construction activity; reductions by our wood processing customers of their capital spending or production of oriented strand board; changes to the global timber supply; cyclical economic conditions affecting the global mining industry; development and use of digital media; currency fluctuations; demand for coal, including economic and environmental risks associated with coal; price increases or shortages of raw materials; dependence on certain suppliers; our acquisition strategy; failure of our information systems or breaches of data security and cybertheft; compliance with government regulations and policies and compliance with laws; implementation of our internal growth strategy; competition; soundness of suppliers and customers; changes in our tax provision or exposure to additional tax liabilities; our ability to successfully manage our manufacturing operations; disruption in production; future restructurings; economic conditions and regulatory changes caused by the United Kingdom’s exit from the European Union; our debt obligations; restrictions in our credit agreement and note purchase agreement; substitution of an alternative index for LIBOR; loss of key personnel and effective succession planning; protection of intellectual property; fluctuations in our share price; soundness of financial institutions; environmental laws and regulations; climate change; environmental, health and safety laws and regulations; adequacy of our insurance coverage; anti-takeover provisions; and reliance on third-party research.

ContactsInvestor Contact Information:Michael McKenney, 978-776-2000IR@kadant.comorMedia Contact Information:Wes Martz, 269-278-1715media@kadant.com