2. Comprehensive
Income
Comprehensive income combines net
income and other comprehensive items, which represent certain amounts that are
reported as components of shareholders’ investment in the accompanying condensed
consolidated balance sheet, including foreign currency translation adjustments,
deferred gains and unrecognized prior service loss associated with pension and
other post-retirement plans, and deferred gains and losses on hedging
instruments. The components of comprehensive income are as follows:
|
|
|
Three
Months Ended
|
|
|
|
|
March
29,
|
|
|
March
31,
|
|
|
(In
thousands)
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
Net
Income
|
|
$ |
5,113 |
|
|
$ |
4,299 |
|
|
Other
Comprehensive Items:
|
|
|
|
|
|
|
|
|
|
Foreign Currency Translation
Adjustment
|
|
|
7,745 |
|
|
|
1,044 |
|
|
Deferred Gain (Loss) on Hedging Instruments (net of income tax of $61 and
$41 in 2008 and 2007, respectively)
|
|
|
238 |
|
|
|
(53 |
) |
|
|
|
|
7,983 |
|
|
|
991 |
|
|
Comprehensive
Income
|
|
$ |
13,096 |
|
|
$ |
5,290 |
|
The
amounts of unrecognized prior service income on pension and other
post-retirement plans reclassified out of other comprehensive income to net
income were $120,000 and $111,000 for the first quarters of 2008 and 2007,
respectively, both net of tax. The amounts of deferred loss on pension and other
post-retirement plans reclassified out of other comprehensive income to
net income were $25,000 and $6,000 for the first quarters of 2008 and 2007,
respectively, both net of tax.
Notes to
Condensed Consolidated Financial Statements
(Unaudited)
3. Earnings
per Share
Basic and diluted earnings per share
are calculated as follows:
|
|
|
Three
Months Ended
|
|
|
|
|
March
29,
|
|
|
March
31,
|
|
|
(In
thousands, except per share amounts)
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
Income
from Continuing Operations
|
|
$ |
5,117 |
|
|
$ |
4,691 |
|
|
Loss
from Discontinued Operation
|
|
|
(4 |
) |
|
|
(392 |
) |
|
|
|
|
|
|
|
|
|
|
|
Net
Income
|
|
$ |
5,113 |
|
|
$ |
4,299 |
|
|
|
|
|
|
|
|
|
|
|
|
Basic
Weighted Average Shares
|
|
|
14,167 |
|
|
|
14,007 |
|
|
Effect
of Stock Options, Restricted Stock Awards and
Employee
Stock Purchase Plan
|
|
|
106 |
|
|
|
207 |
|
|
Diluted
Weighted Average Shares
|
|
|
14,273 |
|
|
|
14,214 |
|
|
|
|
|
|
|
|
|
|
|
|
Basic
Earnings per Share:
|
|
|
|
|
|
|
|
|
|
Continuing Operations
|
|
$ |
.36 |
|
|
$ |
.33 |
|
|
Discontinued Operation
|
|
|
– |
|
|
|
(.02 |
) |
|
Net Income
|
|
$ |
.36 |
|
|
$ |
.31 |
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
Earnings per Share:
|
|
|
|
|
|
|
|
|
|
Continuing
Operations
|
|
$ |
.36 |
|
|
$ |
.33 |
|
|
Discontinued
Operation
|
|
|
– |
|
|
|
(.03 |
) |
|
Net
Income
|
|
$ |
.36 |
|
|
$ |
.30 |
|
|
|
|
|
|
|
|
|
|
|
Options to
purchase approximately 55,500 and 74,100 shares of common stock for the first
quarters of 2008 and 2007, 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.
4. Inventories
The components of inventories are as
follows:
|
|
|
March
29,
|
|
|
December
29,
|
|
|
(In
thousands)
|
|
2008
|
|
|
2007
|
|
|
Raw
Materials and Supplies
|
|
$ |
24,832 |
|
|
$ |
23,587 |
|
|
Work
in Process
|
|
|
14,409 |
|
|
|
9,855 |
|
|
Finished
Goods (includes $2,069 and $2,405 at customer locations)
|
|
|
14,340 |
|
|
|
14,028 |
|
|
|
|
$ |
53,581 |
|
|
$ |
47,470 |
|
Notes to
Condensed Consolidated Financial Statements
(Unaudited)
5. Income
Taxes
The gross
unrecognized tax benefit recorded under Financial Accounting Standards Board
(FASB) Interpretation No. 48 (FIN 48), “Accounting for Uncertainty in Income
Taxes – An Interpretation of FASB Statement No. 109” was $4,354,000
and $4,040,000 at March 29, 2008 and December 29, 2007, respectively. Included
in these balances for both periods were unrecognized tax benefits of $517,000,
which if recognized, would affect goodwill. However, if those tax benefits are
recognized after the adoption of SFAS No. 141(R), the amounts would have an
impact on the annual effective tax rate.
It
is the Company’s practice to include accrued interest and penalties associated
with unrecognized tax benefits as a component of income tax expense. At March
29, 2008 and December 29, 2007, the Company had accrued $1,349,000 and
$1,309,000, respectively, for the potential payment of interest and penalties.
The change in the accrued liability in the first quarter of 2008 is reflected in
the condensed consolidated statement of income.
The
Company does not anticipate that the total amount of unrecognized tax benefit
related to any particular tax position will change significantly within the next
12 months.
As
of March 29, 2008, the Company is under a U.S. Federal income tax examination
for the stub period from January to August 2001 when the Company was part of its
former parent company’s tax return. The Company is subject to
potential examination for the tax years 2004 through 2007 for U.S. Federal tax
and 2001 through 2007 for non-U.S. tax jurisdictions. In addition,
the Company is subject to state and local income tax examinations for the tax
years 2003 through 2007.
6. Long-Term
Obligations and Other Financial Instruments
Long-term
Obligations
Long-term obligations are as
follows:
|
|
|
March
29,
|
|
|
December
29,
|
|
|
(In
thousands)
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
Revolving
Credit Facility
|
|
$ |
28,000 |
|
|
$ |
– |
|
|
Variable
Rate Term Loan, due from 2008 to 2010
|
|
|
– |
|
|
|
25,974 |
|
|
Variable
Rate Term Loan, due from 2008 to 2016
|
|
|
9,250 |
|
|
|
9,250 |
|
|
Variable
Rate Term Loan, due from 2010 to 2011
|
|
|
5,712 |
|
|
|
5,476 |
|
|
Total
Long-Term Obligations
|
|
|
42,962 |
|
|
|
40,700 |
|
|
Less:
Current Maturities
|
|
|
(625 |
) |
|
|
(10,240 |
) |
|
Long-Term
Obligations, less Current Maturities
|
|
$ |
42,337 |
|
|
$ |
30,460 |
|
The
weighted average interest rate for long-term obligations was 4.68% as of March
29, 2008.
Revolving
Credit Facility
On February 13, 2008, the Company entered into a five-year unsecured revolving
credit facility (2008 Credit Agreement) in the aggregate principal amount of up
to $75,000,000, which includes an uncommitted unsecured incremental borrowing
facility of up to an additional $75,000,000. The Company can borrow up to
$75,000,000 under the 2008 Credit Agreement with a sublimit of $60,000,000
within the 2008 Credit Agreement available for the issuances of letters of
credit and bank guarantees. The principal on any borrowings made under the 2008
Credit Agreement is due on February 13, 2013. Interest on any loans outstanding
under the 2008 Credit Agreement accrues and is payable quarterly in arrears at
one of the following rates selected by the Company: (a) the prime rate plus an
applicable margin (up to .20%) or (b) a Eurocurrency rate plus an applicable
margin (up to 1.20%). The applicable margin is determined based upon the
Company’s total debt to earnings before interest, taxes, depreciation and
amortization (EBITDA) ratio. The Company borrowed $28,000,000 under the 2008
Credit Agreement in the first quarter of 2008 and used the majority of the
proceeds to pay off the outstanding variable rate term loan totaling
$25,974,000.
Notes to
Condensed Consolidated Financial Statements
(Unaudited)
6. Long-Term
Obligations and Other Financial Instruments (continued)
The
obligations of the Company under the 2008 Credit Agreement may be accelerated
upon the occurrence of an event of default under the 2008 Credit Agreement,
which includes customary events of default including, without limitation,
payment defaults, defaults in the performance of affirmative and negative
covenants, the inaccuracy of representations or warranties, bankruptcy and
insolvency related defaults, defaults relating to such matters as the Employment
Retirement Income Security Act
(ERISA),
uninsured judgments and the failure to pay certain indebtedness, and a change of
control default.
The loans
under the 2008 Credit Agreement are guaranteed by certain domestic subsidiaries
of the Company pursuant to the Guarantee Agreement effective as of February 13,
2008. In addition, the 2008 Credit Agreement contains negative covenants
applicable to the Company and its subsidiaries, including financial covenants
requiring the Company to comply with a maximum consolidated leverage ratio of
3.5 and a minimum consolidated fixed charge coverage ratio of 1.2, and
restrictions on liens, indebtedness, fundamental changes, dispositions of
property, making certain restricted payments (including dividends and stock
repurchases), investments, transactions with affiliates, sale and leaseback
transactions, swap agreements, changing its fiscal year, arrangements affecting
subsidiary distributions, and entering into new lines of business, and certain
actions related to the discontinued operation. As of March 29, 2008, we
were in compliance with these covenants.
Commercial
Real Estate Loan
On
May 4, 2006, the Company borrowed $10,000,000 under a promissory note (2006
Commercial Real Estate Loan), which is repayable in quarterly installments of
$125,000 over a ten-year period with the remaining principal balance of
$5,000,000 due upon maturity. Interest on the 2006 Commercial Real Estate Loan
accrues and is payable quarterly in arrears at one of the following rates
selected by the Company: (a) the prime rate or (b) the three-month
London Inter-Bank Offered Rate (LIBOR) plus a 1% margin. Effective
February 14, 2008, this margin was lowered to .75%. 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; Three Rivers, Michigan; and
Queensbury, New York, pursuant to mortgage and security agreements dated
May 4, 2006 (Mortgage and Security Agreements).
The
Company’s obligations under the 2006 Commercial Real Estate Loan may be
accelerated upon the occurrence of an event of default under the 2006 Commercial
Real Estate Loan and the Mortgage and Security Agreements, which includes
customary events of default including without limitation payment defaults,
defaults in the performance of covenants and obligations, the inaccuracy of
representations or warranties, bankruptcy- and insolvency-related defaults,
liens on the properties or collateral and uninsured judgments. In addition, the
occurrence of an event of default under the 2008 Credit Agreement or any
successor credit facility would be an event of default under the 2006 Commercial
Real Estate Loan.
Kadant
Jining Loan and Credit Facilities
On
January 28, 2008, the Company’s Kadant Jining subsidiary (Kadant Jining)
borrowed 40 million Chinese renminbi, or approximately $5,712,000 at the March
29, 2008 exchange rate (2008 Kadant Jining Loan). Principal on the 2008 Kadant
Jining Loan is due as follows: 24 million Chinese renminbi, or approximately
$3,427,000, on January 28, 2010 and 16 million Chinese renminbi, or
approximately $2,285,000, on January 28, 2011. Interest on the 2008 Kadant
Jining Loan accrues and is payable quarterly in arrears based on 95% of the
interest rate published by The People’s Bank of China for a loan of the same
term. The proceeds from the 2008 Kadant Jining Loan were used to repay
outstanding debt totaling 40 million Chinese renminbi.
On July 30,
2007, the Company’s Kadant Jining subsidiary and the Company’s Kadant Pulp and
Paper Equipment Light Machinery Co., Ltd. subsidiary (Kadant Yanzhou) each
entered into a short-term credit line facility agreement (Facilities) that would
allow Kadant Jining to borrow up to an aggregate principal amount of 45 million
Chinese renminbi, or approximately $6,426,000 as of March 29, 2008, and Kadant
Yanzhou to borrow up to an aggregate principal amount of 15 million Chinese
renminbi, or approximately $2,142,000 as of March 29, 2008. Both credit
facilities have a term of 364 days. Borrowings made under the Facilities will
bear interest at 90% of the applicable short-term interest rate for a Chinese
renminbi loan of comparable term as published by The People’s Bank of China. The
Facilities will be used for general working capital purposes. We
have
Notes to
Condensed Consolidated Financial Statements
(Unaudited)
6. Long-Term
Obligations and Other Financial Instruments (continued)
provided
a guaranty, dated July 30, 2007, securing the payment of all obligations made
under the Facilities and providing a cross-default to our other senior
indebtedness, including the 2008 Credit Agreement. As of March 29, 2008, there
were no outstanding borrowings under these credit facilities.
Financial
Instruments
To hedge the exposure to movements in the 3-month LIBOR rate on future
outstanding debt, on February 13, 2008, the Company entered into a swap
agreement (2008 Swap Agreement). The 2008 Swap Agreement has a five-year term
and a $15,000,000 notional value, which decreases to $10,000,000 on December 31,
2010, and $5,000,000 on December 30, 2011. Under the 2008 Swap Agreement, on a
quarterly basis the Company will receive a 3-month LIBOR rate and pay a fixed
rate of interest of 3.265% plus the applicable margin.
The Company entered into a swap agreement in 2006 (2006 Swap Agreement) to
convert the 2006 Commercial Real Estate Loan from a floating to a fixed rate of
interest. The 2006 Swap Agreement has the same terms and quarterly payment dates
as the corresponding debt, and reduces proportionately in line with the
amortization of the debt.
The 2006 and 2008 Swap Agreements have been designated as cash flow hedges and
are carried at fair value with unrealized gains or losses reflected within other
comprehensive items. As of March 29, 2008, the net unrealized loss associated
with the 2006 and 2008 Swap Agreements was $1,197,000 included in other
liabilities, with an offset to accumulated other comprehensive items (net of
tax) in the accompanying condensed consolidated balance sheet. Management
believes that any credit risk associated with the 2006 and 2008 Swap Agreements
is remote based on the creditworthiness of the financial institution issuing the
2006 and 2008 Swap Agreements.
7.
Warranty Obligations
The
Company provides for the estimated cost of product warranties at the time of
sale based on the actual historical return rates and repair costs. In the Pulp
and Papermaking Systems (Papermaking Systems) segment, the Company typically
negotiates the terms regarding warranty coverage and length of warranty
depending on the products and applications. While the Company engages in
extensive product quality programs and processes, the Company’s warranty
obligation is affected by product failure rates, repair costs, service delivery
costs incurred in correcting a product failure, and supplier warranties on parts
delivered to the Company. Should actual product failure rates, repair costs,
service delivery costs, or supplier warranties on parts differ from the
Company’s estimates, revisions to the estimated warranty liability would be
required.
The changes in the carrying amount of the Company’s product warranties
included in other current liabilities in the accompanying condensed consolidated
balance sheet are as follows:
|
|
|
Three
Months Ended
|
|
|
(In
thousands)
|
|
March
29,
2008
|
|
|
March
31,
2007
|
|
|
|
|
|
|
|
|
|
|
Balance
at Beginning of Period
|
|
$ |
3,619 |
|
|
$ |
3,164 |
|
|
Provision charged to
income
|
|
|
1,096 |
|
|
|
514 |
|
|
Usage
|
|
|
(748 |
) |
|
|
(546 |
) |
|
Currency
translation
|
|
|
88 |
|
|
|
17 |
|
|
Balance
at End of Period
|
|
$ |
4,055 |
|
|
$ |
3,149 |
|
|
|
|
|
|
|
|
|
|
|
See Note 15 for warranty information
related to the discontinued operation.
Notes to
Condensed Consolidated Financial Statements
(Unaudited)
8. Other
Income and Restructuring Costs, Net
Other
Income
In the first quarter of 2008, the Company sold land in France for $746,000,
resulting in a pre-tax gain of $594,000 ($413,000 after-tax, or $.03 per diluted
share) on the sale.
2006
Restructuring Plan
The
Company recorded restructuring costs of $677,000 in 2006 associated with its
2006 Restructuring Plan. These restructuring costs were comprised of severance
and associated costs related to the reduction of 15 full-time positions in
Canada and France, all at its Papermaking Systems segment. The Company recorded
restructuring costs of $252,000 in 2007 associated with exit costs related to
vacating a facility in Canada. In addition, in 2007, the Company reduced the
restructuring reserve for the 2006 Restructuring Plan by $276,000 as the reserve
was no longer required.
2008
Restructuring Plan
The Company recorded restructuring costs of $121,000 in the first quarter of
2008 associated with its 2008 Restructuring Plan. These restructuring costs were
comprised of severance costs related to the closure of a facility in Sweden that
resulted in the reduction of 3 full-time positions, all at its Papermaking
Systems segment.
A summary of the changes in accrued
restructuring costs is as follows:
|
(In
thousands)
|
|
Severance
&
Other
|
|
|
|
|
|
|
|
2006
Restructuring Plan
|
|
|
|
|
Balance at December 29,
2007
|
|
$ |
308 |
|
|
Usage
|
|
|
(42 |
) |
|
Currency
translation
|
|
|
2 |
|
|
Balance at March 29,
2008
|
|
$ |
268 |
|
|
|
|
|
|
|
|
2008
Restructuring Plan
|
|
|
|
|
|
Balance at December 29,
2007
|
|
$ |
– |
|
|
Provision
|
|
|
121 |
|
|
Currency
translation
|
|
|
7 |
|
|
Balance at March 29,
2008
|
|
$ |
128 |
|
|
|
|
|
|
|
The Company expects
to pay the accrued restructuring costs in 2008.
Notes to
Condensed Consolidated Financial Statements
(Unaudited)
9. Business
Segment Information
The
Company has combined its operating entities into one reportable operating
segment, Papermaking Systems, and two separate product lines, which are reported
in Other, Fiber-based Products and Casting Products, the latter of which was
sold on April 30, 2007. In classifying operational entities into a
particular segment, the Company aggregated businesses with similar economic
characteristics, products and services, production processes, customers, and
methods of distribution.
|
|
|
Three
Months Ended
|
|
|
|
|
March
29,
|
|
|
March
31,
|
|
|
(In
thousands)
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
Papermaking
Systems
|
|
$ |
83,258 |
|
|
$ |
84,034 |
|
|
Other (a)
|
|
|
2,606 |
|
|
|
4,207 |
|
|
|
|
$ |
85,864 |
|
|
$ |
88,241 |
|
|
|
|
|
|
|
|
|
|
|
|
Income
from Continuing Operations Before Provision for
Income
Taxes and Minority Interest Expense:
|
|
|
|
|
|
|
|
|
|
Papermaking Systems
|
|
$ |
10,878 |
|
|
$ |
9,570 |
|
|
Corporate and Other (b)
|
|
|
(3,322 |
) |
|
|
(2,186 |
) |
|
Total Operating Income
|
|
|
7,556 |
|
|
|
7,384 |
|
|
Interest Expense, Net
|
|
|
(54 |
) |
|
|
(455 |
) |
|
|
|
$ |
7,502 |
|
|
$ |
6,929 |
|
|
|
|
|
|
|
|
|
|
|
|
Capital
Expenditures:
|
|
|
|
|
|
|
|
|
|
Papermaking
Systems
|
|
$ |
1,425 |
|
|
$ |
775 |
|
|
Corporate
and Other
|
|
|
185 |
|
|
|
63 |
|
|
|
|
$ |
1,610 |
|
|
$ |
838 |
|
(a) “Other”
includes the results from the Fiber-based Products business and the Castings
Products business, the latter of which was sold
on April 30, 2007.
(b) Corporate
primarily includes general and administrative expenses.
10. Stock-Based
Compensation
Stock Options
There
were no stock options granted in the first quarter of 2008.
Restricted
Shares and Restricted Stock Unit Awards
On March 3, 2008, the Company granted an aggregate of 20,000 restricted stock
units (RSUs) to its outside directors with an aggregate fair value of $488,000,
which will vest at a rate of 5,000 shares per quarter on the last day of each
quarter in 2008. The Company recognized a tax benefit of $10,000 associated with
these RSUs in the first quarter of 2008. The March 3, 2008 awards also included
an aggregate of 40,000 RSUs with an aggregate fair value of $975,000 which will
only vest and compensation expense will only be recognized upon a change in
control as defined in the Company’s 2006 equity incentive plan. These RSUs are
forfeited if a change in control does not occur by the end of the first quarter
of 2009.
In February 2007, the Company granted an aggregate of 20,000 restricted shares
to its outside directors with an aggregate fair value of $464,000, which vested
at a rate of 5,000 shares per quarter on the last day of each quarter. In
February 2007, the Company also granted an aggregate of 40,000 restricted shares
with an aggregate fair value of $928,000 to its outside directors, which only
would have vested if a change in control had occurred prior to the end of the
first quarter of 2008. These restricted shares were forfeited at the
end of the first quarter of 2008 with no compensation expense
recognized.
Notes to
Condensed Consolidated Financial Statements
(Unaudited)
10. Stock-Based
Compensation (continued)
Performance-Based
Restricted Stock Units
On March 3, 2008, the Company granted to certain officers of the Company
performance-based RSUs which represent, in aggregate, the right to receive
93,000 shares (the target RSU amount), subject to adjustment, with a grant date
fair value of $25.07 per share. The RSUs will cliff vest in their entirety on
the last day of the Company’s 2010 fiscal year, provided that the officer
remains employed by the Company through the vesting date. The target RSU amount
is subject to adjustment based on the achievement of specified EBITDA targets
generated from continuing operations for the 2008 fiscal year. In the first
quarter of 2008, the Company recognized compensation expense based on the
probable number of RSUs to be granted, which was 100% of the target RSU
amount.
On May 24, 2007, the Company granted to certain officers of the
Company performance-based RSUs which represented, in aggregate, the right to
receive 104,000 shares (the target RSU amount), subject to adjustment, with a
grant date fair value of $28.21 per share. The RSUs will cliff vest in their
entirety on the last day of the Company’s 2009 fiscal year, provided that the
officer remains employed by the Company through the vesting date. The target RSU
amount was subject to adjustment based on the achievement of specified EBITDA
targets generated from continuing operations for the nine-month period ended
December 29, 2007, which were exceeded, and resulted in an adjusted RSU
amount of 134,160 shares deliverable upon vesting.
The RSU agreements provide for forfeiture in certain events, such as
voluntary or involuntary termination of employment, and for acceleration of
vesting in certain events, such as death, disability or a change in control of
the Company. If the officer dies or is disabled prior to the vesting date, then
a ratable portion of the RSUs will vest. If a change in control occurs prior to
the end of the performance period, the officer will receive the target RSU
amount; otherwise, the officer will receive the number of deliverable RSUs based
on the achievement of the performance goal, as stated in the RSU
agreements.
Each RSU represents the right to receive one share of the Company’s
common stock upon vesting. The Company is recognizing compensation expense
associated with performance-based RSUs ratably over the vesting period based on
the grant date fair value. Compensation expense of $417,000 was recognized in
the first quarter of 2008 associated with these performance-based RSUs.
Unrecognized compensation expense related to the unvested performance-based RSUs
totaled approximately $4,830,000 as of March 29, 2008 and will be
recognized over a weighted average period of 2 years.
Time-Based
Restricted Stock Units
On
May 24, 2007, the Company granted 61,550 time-based RSUs with a grant date
fair value of $28.21 per share and on March 3, 2008, the Company granted 12,000
time-based RSUs with a grant date fair value of $25.07 per share 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 time-based RSUs will
cliff vest in their entirety four years from their grant date, provided the
recipients remain employed with the Company through the vesting date, as
follows: 61,550 on May 24, 2011 and 12,000 on March 3, 2012. The time-based
RSU agreement provides for forfeiture in certain events, such as voluntary or
involuntary termination of employment, and for acceleration of vesting in
certain events, such as death, disability, or a change in control of the
Company. The Company is recognizing compensation expense associated with these
time-based RSUs ratably over the vesting period based on the grant date fair
value. Compensation expense of $114,000 was recognized in the first quarter of
2008 associated with the time-based RSUs. Unrecognized compensation expense
related to the time-based RSUs totaled approximately $1,663,000 as of
March 29, 2008 and will be recognized over a weighted average period of 3
years.
Notes to
Condensed Consolidated Financial Statements
(Unaudited)
10. Stock-Based
Compensation (continued)
A summary of the status of the Company’s unvested restricted share/unit awards
for the quarter ended March 29, 2008 is as follows:
|
|
|
Restricted
Shares/Unit
Awards
(In
thousands)
|
|
|
Weighted
Average
Grant-Date
Fair
Value
|
|
|
|
|
|
|
|
|
|
|
Unvested
at December 29, 2007
|
|
|
236 |
|
|
$ |
27.36 |
|
|
Granted
|
|
|
165 |
|
|
$ |
24.82 |
|
|
Vested
|
|
|
(5 |
) |
|
$ |
24.38 |
|
|
Forfeited
/ Expired
|
|
|
(40 |
) |
|
$ |
23.20 |
|
|
Unvested
at March 29, 2008
|
|
|
356 |
|
|
$ |
26.69 |
|
11.
Employee Benefit Plans
Defined
Benefit Pension Plans and Post-Retirement Welfare Benefit Plans
The
Company’s Kadant Web Systems subsidiary has a noncontributory defined benefit
retirement plan. Benefits under the plan are based on years of service and
employee compensation. Funds are contributed to a trustee as necessary to
provide for current service and for any unfunded projected benefit obligation
over a reasonable period. Effective December 31, 2005, this plan was closed
to new participants. This same subsidiary also has a post-retirement welfare
benefits plan (included in the table below in “Other Benefits”). No future
retirees are eligible for this post-retirement welfare benefits plan, and the
plans include limits on the subsidiary’s contributions.
The
Company’s Kadant Lamort subsidiary sponsors a defined benefit pension plan
(included in the table below in “Other Benefits”). Benefits under this plan are
based on years of service and projected employee compensation.
The
Company’s Kadant Johnson subsidiary also offers a post-retirement welfare
benefits plan (included in the table below in “Other Benefits”) to its U.S.
employees upon attainment of eligible retirement age. This plan is closed to
employees who will not meet its retirement eligibility requirements on
January 1, 2012.
Notes to
Condensed Consolidated Financial Statements
(Unaudited)
11. Employee
Benefit Plans (continued)
The components of the net periodic benefit cost (income) for the pension
benefits and other benefits plans in the first quarters of 2008 and 2007 are as
follows:
|
|
|
Three
Months Ended
|
|
|
Three
Months Ended
|
|
|
|
|
March 29, 2008
|
|
|
March 31, 2007
|
|
|
|
|
Pension Benefits
|
|
|
Other
Benefits
|
|
|
Pension
Benefits
|
|
|
Other
Benefits
|
|
|
(In
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Components
of Net Periodic Benefit Cost (Income):
|
|
|
|
|
|
|
|
|
|
|
|
Service cost
|
|
$ |
216 |
|
|
$ |
21 |
|
|
$ |
208 |
|
|
$ |
25 |
|
|
Interest cost
|
|
|
297 |
|
|
|
63 |
|
|
|
276 |
|
|
|
57 |
|
|
Expected return on plan
assets
|
|
|
(368 |
) |
|
|
– |
|
|
|
(370 |
) |
|
|
– |
|
|
Recognized net actuarial
loss
|
|
|
11 |
|
|
|
– |
|
|
|
– |
|
|
|
9 |
|
|
Amortization of prior service
cost (income)
|
|
|
14 |
|
|
|
(198 |
) |
|
|
14 |
|
|
|
(196 |
) |
|
Net
periodic benefit cost (income)
|
|
$ |
170 |
|
|
$ |
(114 |
) |
|
$ |
128 |
|
|
$ |
(105 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The weighted-average assumptions used to determine net periodic benefit
cost (income) are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount
rate
|
|
|
6.00 |
% |
|
|
5.90 |
% |
|
|
5.75 |
% |
|
|
5.47 |
% |
|
Expected
long-term return on plan assets
|
|
|
8.50 |
% |
|
|
– |
|
|
|
8.50 |
% |
|
|
– |
|
|
Rate
of compensation increase
|
|
|
4.00 |
% |
|
|
2.00 |
% |
|
|
4.00 |
% |
|
|
2.00 |
% |
The
Company made a $200,000 cash contribution to the Kadant Web Systems
noncontributory defined benefit retirement plan in the first quarter of 2008 and
expects to make three quarterly cash contributions of $400,000 each over the
remainder of 2008. For the remaining pension and post-retirement welfare
benefits plans, the Company does not expect to make any cash contributions in
2008 other than funding current benefit payments.
12. Fair
Value Measurements
The
Company adopted Statement of Financial Accounting Standards (SFAS) No. 157 (SFAS
157), “Fair Value Measurements,” on December 30, 2007, which did not have a
material impact on the Company’s fair value measurements. SFAS 157 defines fair
value as the price that would be received to sell an asset or paid to transfer a
liability in the principal or most advantageous market for the asset or
liability in an orderly transaction between market participants at the
measurement date. SFAS 157 establishes a fair value hierarchy, which prioritizes
the inputs used in measuring fair value into three broad levels as
follows:
|
·
|
Level
1 – Quoted prices in active markets for identical assets or
liabilities.
|
|
·
|
Level
2 – Inputs, other than the quoted prices in active markets, that are
observable either directly or
indirectly.
|
|
·
|
Level
3 – Unobservable inputs based on the Company’s own
assumptions.
|
The following table presents the fair value hierarchy for those assets and
liabilities measured at fair value on a recurring basis as of March 29,
2008:
|
(In
thousands)
|
|
Fair
Value at March 29, 2008
|
|
|
|
|
Level
1
|
|
|
Level
2
|
|
|
Level
3
|
|
|
Total
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange forward
contracts
|
|
$ |
– |
|
|
$ |
1,600 |
|
|
$ |
– |
|
|
$ |
1,600 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-rate swap
agreements
|
|
$ |
– |
|
|
$ |
1,197 |
|
|
$ |
– |
|
|
$ |
1,197 |
|
Notes to
Condensed Consolidated Financial Statements
(Unaudited)
12. Fair
Value Measurements (continued)
The fair values of
our interest-rate swap agreements are based on LIBOR yield curves at the
reporting date. The fair values of the Company’s foreign exchange forward
contracts are based on quoted forward foreign exchange prices at the reporting
date. The foreign exchange forward 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.
13. Pending
Litigation
The Company has been named as a co-defendant, together with our Kadant
Composites LLC subsidiary (Composites LLC) and another defendant, in a consumer
class action lawsuit filed in the United States District Court for the District
of Massachusetts on behalf of a putative class of individuals who own GeoDeck™
decking or railing products manufactured by Composites LLC between April 2002
and October 2003. The complaint in this matter purports to assert, among other
things, causes of action for unfair and deceptive trade practices, fraud,
negligence, breach of warranty and unjust enrichment, and it seeks compensatory
damages and punitive damages under various state consumer protection statutes,
which plaintiffs claim exceed $50 million. The Company intends to defend against
this action vigorously, but there is no assurance it will prevail in such
defense. On March 14, 2008, the Company, Composites LLC, and the other
co-defendants filed motions to dismiss all counts in the complaint, which is
currently pending. We could incur substantial costs to defend ourselves in this
lawsuit and a judgment or a settlement of the claims against the defendants
could have a material adverse impact on the Company’s consolidated financial
results. The Company has not made an accrual related to this litigation as it
believes that an adverse outcome is not probable and estimable at this
time.
14. Recent
Accounting Pronouncements
In February 2007, the FASB issued SFAS No. 159 (SFAS 159), “The Fair Value
Option for Financial Assets and Financial Liabilities—including an Amendment of
FASB Statement No. 115.” SFAS 159 permits entities to measure eligible
financial assets, financial liabilities and certain other assets and
liabilities at fair value on an instrument-by-instrument basis. The fair
value measurement election is irrevocable once made and subsequent changes in
fair value must be recorded in earnings. The effect of adoption will be
reported as a cumulative-effect adjustment to beginning retained earnings. The
Company adopted SFAS 159 in the first quarter of 2008, which did not have
an effect on its consolidated financial position or results of
operations.
In December 2007, the FASB issued SFAS No. 141(R), “Business
Combinations” (SFAS 141(R)), which replaces SFAS No. 141.
SFAS No. 141(R) requires an acquirer to recognize the assets acquired,
the liabilities assumed, any non-controlling interest in the acquiree, and any
goodwill acquired to be measured at their fair values at the acquisition date.
SFAS 141(R) also establishes disclosure requirements, which will enable users to
evaluate the nature and financial effects of the business combination.
SFAS 141(R) is effective for fiscal years beginning after December 15,
2008. The adoption of SFAS 141(R) will have an impact on accounting for
business combinations completed subsequent to its adoption and for certain
transactions prior to adoption. As of March 29, 2008, the Company had a
valuation allowance of $1,270,000 relating to the Kadant Johnson acquisition, a
liability for unrecognized tax benefits of $517,000, and accrued interest and
penalties of $843,000, all of which would affect goodwill, if recognized.
However, if those tax benefits are recognized after the adoption of SFAS
No. 141(R), the amounts would instead have an effect on the Company’s
annual effective tax rate.
In December 2007, the FASB issued SFAS No. 160, “Noncontrolling
Interests in Consolidated Financial Statements—an amendment of Accounting
Research Bulletin No. 51” (SFAS 160), which establishes
accounting and reporting standards for ownership interests in subsidiaries held
by parties other than the parent, the amount of consolidated net income
attributable to the parent and to the noncontrolling interest, changes in a
parent’s ownership interest and the valuation of retained non-controlling equity
investments when a subsidiary is deconsolidated. SFAS 160 also establishes
reporting requirements that provide sufficient disclosures that clearly identify
and distinguish between the interests of the parent and the interests of the
non-controlling owners. SFAS 160 is effective for fiscal years beginning
after December 15, 2008. The Company is currently evaluating the effect
that SFAS 160 will have on its consolidated financial statements.
In March 2008, the FASB
issued SFAS No. 161, "Disclosures about Derivative Instruments and Hedging
Activities" (SFAS 161). SFAS 161 requires disclosures of how and why an entity
uses derivative instruments, how derivative instruments and related hedged items
are accounted for and how derivative instruments and related hedged items affect
an entity's financial position, financial performance and cash flows. SFAS 161
is effective for fiscal years beginning after November 15, 2008. The Company is
currently evaluating the effect that SFAS 161 will have on its consolidated
financial statements.
Notes to
Condensed Consolidated Financial Statements
(Unaudited)
15.
Discontinued Operation
On October 21, 2005, Composites LLC sold its composites business
and 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.
Operating results for the discontinued operation included in
the accompanying condensed consolidated statement of income are as
follows:
|
|
|
Three
Months Ended
|
|
|
|
|
March
29,
|
|
|
March
31,
|
|
|
(In
thousands)
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
Operating
Loss
|
|
$ |
(7 |
) |
|
$ |
(665 |
) |
|
Interest
Income
|
|
|
– |
|
|
|
36 |
|
|
|
|
|
|
|
|
|
|
|
|
Loss
Before Income Tax Benefit
|
|
|
(7 |
) |
|
|
(629 |
) |
|
Income
Tax Benefit
|
|
|
3 |
|
|
|
237 |
|
|
|
|
|
|
|
|
|
|
|
|
Loss
From Discontinued Operation
|
|
$ |
(4 |
) |
|
$ |
(392 |
) |
The major classes of assets and liabilities of the discontinued operation
included in the accompanying condensed consolidated balance sheet are as
follows:
|
|
|
March 29,
|
|
|
December
29,
|
|
|
(In
thousands)
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$ |
3 |
|
|
$ |
3 |
|
|
Other
accounts receivable
|
|
|
322 |
|
|
|
322 |
|
|
Current
deferred tax asset
|
|
|
769 |
|
|
|
769 |
|
|
Other
assets
|
|
|
191 |
|
|
|
199 |
|
|
|
|
|
|
|
|
|
|
|
|
Total
Assets
|
|
|
1,285 |
|
|
|
1,293 |
|
|
|
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
|
255 |
|
|
|
255 |
|
|
Accrued
warranty costs
|
|
|
2,142 |
|
|
|
2,142 |
|
|
Other
current liabilities
|
|
|
31 |
|
|
|
31 |
|
|
|
|
|
|
|
|
|
|
|
|
Total
Liabilities
|
|
|
2,428 |
|
|
|
2,428 |
|
|
|
|
|
|
|
|
|
|
|
|
Net
Liabilities
|
|
$ |
(1,143 |
) |
|
$ |
(1,135 |
) |
As part of the sale transaction, Composites LLC retained the warranty
obligations associated with products manufactured prior to the sale date.
Through the sale date of October 21, 2005, Composites LLC offered a
standard limited warranty to the owners of
its decking and roofing products, limited to repair or replacement of the
defective product or a refund of the original purchase price.
Notes to
Condensed Consolidated Financial Statements
(Unaudited)
15. Discontinued
Operation (continued)
Through the second quarter of 2006, Composites LLC recorded an estimate for
warranty-related costs at the time of sale based on its actual historical return
rates and repair costs, as well as other analytical tools for estimating future
warranty claims. These estimates were revised for variances between actual and
expected claims rates. Composites LLC’s analysis of expected warranty claims
rates included detailed assumptions associated with potential product returns,
including the type of product sold, temperatures at the location of
installation, density of boards, and other factors. Certain assumptions, such as
the effect of weather conditions and high temperatures on the product installed,
included inherent uncertainties that contributed to variances between actual and
expected claims rates.
During the third quarter of 2006, Composites LLC concluded that the
assumptions noted above were not accurately predicting the actual level of
warranty claims, making it no longer possible to calculate a reasonable estimate
of the future level of potential warranty claims. Accordingly, as no amount
within the total range of loss represents a best estimate of the ultimate loss
to be recorded, the Company is required under SFAS No. 5 (SFAS 5),
“Accounting for Contingencies,” to record the minimum amount of the potential
range of loss for products under warranty. As of March 29, 2008, the
accrued warranty costs associated with the composites business were $2,142,000,
which represent the low end of the estimated range of warranty reserve required
based on the level of claims received by Composites LLC. 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 accrued warranty costs to
reflect the minimum amount of the potential range of loss for products under
warranty based on judgments known to be entered against it in litigation, if
any.
A
summary of the changes in accrued warranty costs in the first quarters of 2008
and 2007 is as follows:
|
|
|
Three
Months Ended
|
|
|
|
|
March
29,
|
|
|
March
31,
|
|
|
(In
thousands)
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
Balance
at Beginning of Period
|
|
$ |
2,142 |
|
|
$ |
1,135 |
|
|
Provision
|
|
|
– |
|
|
|
556 |
|
|
Reimbursement
|
|
|
– |
|
|
|
110 |
|
|
Usage
|
|
|
– |
|
|
|
(621 |
) |
|
|
|
|
|
|
|
|
|
|
|
Balance
at End of Period
|
|
$ |
2,142 |
|
|
$ |
1,180 |
|
The reimbursement of $110,000 in the first quarter of 2007 represents
reimbursements owed from the buyer of the composites business to Composites LLC
for a portion of the claims paid as provided in the sales
agreement.
See Note 13 for information related to pending litigation associated with the
composites business.
16. Subsequent
Event
On May 5, 2008, the Company’s board of directors approved the repurchase by the
Company of up to $30 million of its equity securities during the period from May
5, 2008 through May 5, 2009. Repurchases may be made in public or private
transactions, including under Securities Exchange Act Rule 10b-5-1 trading
plans.
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 two separate
product lines reported in Other Businesses, which include Fiber-based Products
and, until its sale in April 2007, Casting Products. Through our Papermaking
Systems segment, we develop, manufacture, and market a range of equipment and
products for the global papermaking and paper recycling industries. We have a
large customer base that includes most of the world’s major paper manufacturers.
We believe our large installed base provides us with a spare parts and
consumables business that yields higher margins than our capital equipment
business, and which should be less susceptible to the cyclical trends in the
paper industry.
Through
our Fiber-based Products line, we manufacture and sell granules derived from
pulp fiber for use as carriers for agricultural, home lawn and garden, and
professional lawn, turf and ornamental applications, as well as for oil and
grease absorption. Our Casting Products business manufactured grey and ductile
iron castings until its sale on April 30, 2007.
In
addition, prior to its sale on October 21, 2005, we operated a composite
building products business, which is presented as a discontinued operation in
the accompanying condensed consolidated financial statements.
We were
incorporated in Delaware in November 1991. On July 12, 2001, we changed our name
to Kadant Inc. from Thermo Fibertek Inc. Our common stock is listed on the New
York Stock Exchange, where it trades under the symbol “KAI.”
Papermaking
Systems Segment
Our Papermaking Systems segment designs
and manufactures stock-preparation systems and equipment, fluid-handling systems
and equipment, paper machine accessory equipment, and water-management systems
primarily for the paper and paper recycling industries. Our principal products
include:
|
|
-
|
Stock-preparation systems and
equipment: custom-engineered systems and equipment, as well as
standard individual components, for pulping, de-inking, screening,
cleaning, and refining recycled and virgin fibers for preparation for
entry into the paper machine during the production of recycled
paper;
|
|
|
-
|
Fluid handling systems and
equipment: rotary joints, precision unions, steam and condensate
systems, components, and controls used primarily in the dryer section of
the papermaking process and during the production of corrugated boxboard,
metals, plastics, rubber, textiles and
food;
|
|
|
-
|
Paper machine accessory
equipment: doctoring systems and related consumables that
continuously clean papermaking rolls to keep paper machines running
efficiently; doctor blades made of a variety of materials to perform
functions
|
Overview
(continued)
|
|
including
cleaning, creping, web removal, and application of coatings; and profiling
systems that control moisture, web curl, and gloss during paper
production; and
|
|
|
-
|
Water-management systems:
systems and equipment used to continuously clean paper machine
fabrics, drain water from pulp mixtures, form the sheet or web, and
filter the process water for
reuse.
|
Other
Businesses
Our other
businesses include our Fiber-based Products business and, prior to its sale on
April 30, 2007, our Casting Products business.
Our
Fiber-based Products business produces biodegradable, absorbent granules from
papermaking byproducts for use primarily as carriers for agricultural, home lawn
and garden, and professional lawn, turf and ornamental applications, as well as
for oil and grease absorption.
Our
Casting Products business manufactured grey and ductile iron castings. We sold
this business on April 30, 2007.
Discontinued
Operation
On
October 21, 2005, our Kadant Composites LLC subsidiary (Composites LLC)
sold substantially all of its assets to LDI Composites Co. for approximately
$11.9 million in cash and the assumption of $0.7 million of liabilities,
resulting in a cumulative loss on sale of $0.1 million. Under the terms of the
asset purchase agreement, Composites LLC retained certain liabilities associated
with the operation of the business prior to the sale, including warranty
obligations related to products manufactured prior to the sale date. 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 owners of its decking and roofing products, limited to repair or
replacement of the defective product or a refund of the original purchase price.
Through the second quarter of 2006, Composites LLC recorded an estimate for
warranty-related costs at the time of sale based on its actual historical return
rates and repair costs, as well as other analytical tools for estimating future
warranty claims. These estimates were revised for variances between actual and
expected claims rates. Composites LLC’s analysis of expected warranty claims
rates included detailed assumptions associated with potential product returns,
including the type of product sold, temperatures at the location of
installation, density of boards, and other factors. Certain assumptions, such as
the effect of weather conditions and high temperatures on the product installed,
included inherent uncertainties that contributed to variances between actual and
expected claims rates.
During
the third quarter of 2006, Composites LLC concluded that the assumptions noted
above were not accurately predicting the actual level of warranty claims, making
it no longer possible to calculate a reasonable estimate of the future level of
potential warranty claims. Accordingly, as no amount within the total range of
loss represents a best estimate of the ultimate loss to be recorded, Composites
LLC is required under Statement of Financial Accounting Standards (SFAS)
No. 5, “Accounting for Contingencies” (SFAS 5), to record the minimum
amount of the potential range of loss for products under warranty. As of
March 29, 2008, the accrued warranty costs associated with the composites
business were $2.1 million, which represent the low end of the estimated range
of warranty reserve required based on the level of claims received by Composites
LLC through the end of the first quarter of 2008. Composites LLC has calculated
that the total potential warranty cost ranges from $2.1 million to approximately
$13.1 million. The high end of the range represents the estimated maximum level
of warranty claims remaining based on the total sales of the products under
warranty. Composites LLC 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.
Composites LLC will continue to record adjustments to accrued warranty costs to
reflect the minimum amount of the potential range of loss for products under
warranty based on judgments known to be entered against it in litigation, if
any.
Overview
(continued)
Composites
LLC’s inability to pay or process warranty claims has exposed the Company to
greater risks associated with litigation. For more information regarding our
current litigation arising from these claims, see Part II, Item 1, “Legal
Proceedings,” and Part II, Item 1A, “Risk Factors”.
International
Sales
During the first quarters of 2008 and 2007, approximately 59% and 61%,
respectively, of our sales were to customers outside the United States,
principally in China and Europe. We generally seek to charge our customers in
the same currency in which our operating costs are incurred. However, our
financial performance and competitive position can be affected by currency
exchange rate fluctuations affecting the relationship between the U.S. dollar
and foreign currencies. We seek to reduce our exposure to currency fluctuations
through the use of forward currency exchange contracts. We may enter into
forward contracts to hedge certain firm purchase and sale commitments
denominated in currencies other than our subsidiaries’ functional currencies.
These contracts hedge transactions principally denominated in U.S.
dollars.
Application
of Critical Accounting Policies and Estimates
The discussion and analysis of our
financial condition and results of operations are based upon our condensed
consolidated financial statements, which have been prepared in accordance with
accounting principles generally accepted in the United States. The preparation
of these condensed consolidated financial statements requires us to make
estimates and assumptions that affect the 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 December 29, 2007, filed with the Securities and Exchange Commission
(SEC). There have been no material changes to these critical accounting policies
since fiscal year-end 2007.
Industry
and Business Outlook
Our products are primarily sold to the
global pulp and paper industry. The paper industry in North America and Europe
has been in a prolonged down cycle for the past several years and has undergone
important structural changes during that time. In contrast, the paper industry
in China has experienced strong growth over the last several years. The growth
rate of the U.S. economy has slowed considerably in recent months and general
economic conditions have led to additional caution among our customers
worldwide, including in Asia, which could have an adverse effect on our
business. Paper producers in North America and Europe continue to be negatively
affected by higher operating costs, especially higher energy and chemical costs.
We believe paper companies are still cautious about increasing their capital and
operating spending in the current market environment. We continue to concentrate
our efforts on several initiatives intended to improve our operating results,
including: emphasizing products that provide our customers a good return on
their investment; increasing aftermarket and consumables sales, especially in
China; increasing sales of paper machine accessories and water-management
products, especially in China and Germany; increasing sales in growth markets,
such as China, Russia, Eastern Europe, and India; increasing our use of low-cost
manufacturing bases in China and Mexico; penetrating new markets outside the
paper industry; and pursuing acquisition opportunities that complement our
business. In addition, we continue to focus our efforts on managing our
operating costs, capital expenditures, and working capital.
In the last several years, China
has become a significant market for our stock-preparation equipment. A large
percentage of the world’s increases in paper production capacity are in China.
Consequently, competition is intense and there is increasing pricing pressure,
particularly for large systems. To capitalize on this growing market, we started
manufacturing certain of our accessory and water-management products in our
China facilities in 2007. Currently, our revenues from China are primarily
derived from large capital orders, the timing of which is often difficult to
predict. At times, our customers in China have
Overview
(continued)
experienced
delays in obtaining financing for their capital addition and expansion projects
due to efforts by the Chinese government to control economic growth, which are
reflected in a slowdown in financing approvals in China’s banking system. In
addition, worsening economic conditions in the U.S. have led some customers in
China to defer or slow down capital projects, especially those dependent on
exports to the West, such as linerboard production. These delays, as well as
delays in receiving down payments, which have recently become more pronounced,
could cause us to recognize revenue on these projects in periods later than
originally anticipated. We plan to use our Kadant Jining subsidiary, acquired in
June 2006, as a base for increasing our aftermarket business, which we believe
will be more predictable.
We expect
generally accepted accounting principles (GAAP) revenues and earnings per share
from continuing operations, which exclude the results from our discontinued
operation, as follows: For the second quarter of 2008, we expect to earn between
$.41 and $.43 per diluted share on revenues of $94 to $96 million; and for the
full year 2008, we expect to earn between $1.85 and $1.90 per diluted share on
revenues of $385 to $395 million.
Results
of Operations
First Quarter
2008 Compared With First Quarter
2007
The
following table sets forth our unaudited condensed consolidated statement of
income expressed as a percentage of total revenues from continuing operations
for the first fiscal quarters of 2008 and 2007. The results of operations for
the fiscal quarter ended March 29, 2008 are not necessarily indicative of the
results to be expected for the full fiscal year.
|
|
|
Three
Months Ended
|
|
|
|
|
March
29,
|
|
|
March
31,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
100 |
% |
|
|
100 |
% |
|
|
|
|
|
|
|
|
|
|
|
Costs
and Operating Expenses:
|
|
|
|
|
|
|
|
|
|
Cost of
revenues
|
|
|
60 |
|
|
|
63 |
|
|
Selling, general, and
administrative expenses
|
|
|
30 |
|
|
|
27 |
|
|
Research and development
expenses
|
|
|
2 |
|
|
|
2 |
|
|
Other income and restructuring
costs, net
|
|
|
(1 |
) |
|
|
– |
|
|
|
|
|
91 |
|
|
|
92 |
|
|
|
|
|
|
|
|
|
|
|
|
Operating
Income
|
|
|
9 |
|
|
|
8 |
|
|
|
|
|
|
|
|
|
|
|
|
Interest
Income
|
|
|
1 |
|
|
|
1 |
|
|
Interest
Expense
|
|
|
(1 |
) |
|
|
(1 |
) |
|
|
|
|
|
|
|
|
|
|
|
Income
from Continuing Operations Before Provision for Income
Taxes
|
|
|
9 |
|
|
|
8 |
|
|
Provision
for Income Taxes
|
|
|
(3 |
) |
|
|
(3 |
) |
|
|
|
|
|
|
|
|
|
|
|
Income
from Continuing Operations
|
|
|
6 |
|
|
|
5 |
|
|
Loss
from Discontinued Operation
|
|
|
– |
|
|
|
– |
|
|
Net
Income
|
|
|
6 |
% |
|
|
5 |
% |
Revenues
Revenues
decreased to $85.9 million in the first quarter of 2008 from $88.2 million in
the first quarter of 2007, a decrease of $2.3 million, or 3%. Revenues in the
first quarter of 2008 include a $4.5 million, or 5%, increase from the favorable
effects of currency translation, while revenues in the first quarter of 2007
include $1.2 million from our Casting Products business, which was sold in April
2007.
Results
of Operations (continued)
Revenues
for the first quarters of 2008 and 2007 from our Papermaking Systems segment and
our other businesses are as follows:
|
|
|
Three
Months Ended
|
|
|
|
|
March
29,
|
|
|
March
31,
|
|
|
(In
thousands)
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
Papermaking
Systems
|
|
$ |
83,258 |
|
|
$ |
84,034 |
|
|
Other Businesses
|
|
|
2,606 |
|
|
|
4,207 |
|
|
|
|
$ |
85,864 |
|
|
$ |
88,241 |
|
Papermaking Systems Segment. Revenues in the
Papermaking Systems segment were $83.3 million in the first quarter of
2008 compared to $84.0 million in the first quarter of 2007, a decrease of
$0.7 million, or 1%. Revenues in 2008 include a $4.5 million, or 5%, increase
from the favorable effects of currency translation.
The
following table presents revenues at the Papermaking Systems segment by product
line, the changes in revenues by product line between the first quarters of 2008
and 2007, and the changes in revenues by product line between the first quarters
of 2008 and 2007 excluding the effect of currency translation. The presentation
of the changes in revenues by product line excluding the effect of currency
translation is a non-GAAP measure. We believe this non-GAAP measure helps
investors gain a better understanding of our underlying operations, consistent
with how management measures and forecasts the Company’s performance, especially
when comparing such results to prior periods.
|
|
|
Three
Months Ended
|
|
|
Increase
(Decrease)
Excluding
Effect
of
|
|
|
(In
millions)
|
|
March
29,
2008
|
|
|
March
31,
2007
|
|
|
Increase
(Decrease)
|
|
|
Currency
Translation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product
Line:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-Preparation
Equipment
|
|
$ |
36.3 |
|
|
$ |
39.9 |
|
|
$ |
(3.6 |
) |
|
$ |
(5.5 |
) |
|
Fluid-Handling
|
|
|
22.5 |
|
|
|
20.1 |
|
|
|
2.4 |
|
|
|
0.7 |
|
|
Accessories
|
|
|
15.9 |
|
|
|
15.5 |
|
|
|
0.4 |
|
|
|
(0.2 |
) |
|
Water-Management
|
|
|
8.0 |
|
|
|
7.9 |
|
|
|
0.1 |
|
|
|
(0.2 |
) |
|
Other
|
|
|
0.6 |
|
|
|
0.6 |
|
|
|
0.0 |
|
|
|
0.0 |
|
|
|
|
$ |
83.3 |
|
|
$ |
84.0 |
|
|
$ |
(0.7 |
) |
|
$ |
(5.2 |
) |
Revenues from the segment’s
stock-preparation equipment product line decreased $3.6 million, or 9%, in the
first quarter of 2008 compared to the first quarter of 2007, including a $1.9
million, or 5%, increase from the favorable effect of currency translation.
Excluding the effect of currency translation, revenues from the segment’s stock
preparation equipment product line decreased $5.5 million, or 14%, primarily due
to delays in capital projects in North America and China.
Revenues from the segment’s
fluid-handling product line increased $2.4 million, or 12%, in the first quarter
of 2008 compared to the first quarter of 2007, including a $1.7 million, or 9%,
increase from the favorable effect of currency translation. Excluding the effect
of currency translation, revenues from the segment’s fluid-handling product line
increased $0.7 million, or 3%, primarily due to stronger demand in Europe, Latin
America and, to a lesser extent, Southeast Asia. These increases were largely
offset by a decrease in revenues from capital projects in the
U.S.
Revenues
from the segment’s accessories product line increased $0.4 million, or 2%, in
the first quarter of 2008 compared to the first quarter of 2007, including a
$0.6 million, or 4%, increase from the favorable effect of currency
translation. Excluding
Results
of Operations (continued)
the
effect of currency translation, revenues from the segment’s accessories product
line decreased $0.2 million, or 2%, primarily due to weaker demand in Europe,
slightly offset by an increase in sales in the U.S.
Revenues
from the segment’s water-management product line increased $0.1 million, or 1%,
in the first quarter of 2008 compared to the first quarter of 2007, including
a $0.3 million, or 3%, increase from the favorable effect of currency
translation. Excluding the effect of currency translation, revenues from the
segment’s water management product line decreased $0.2 million, or 2%, primarily
due to a decrease in capital sales in North America and, to a lesser
extent, Europe, offset in part by increased sales of our water-management
products in China.
Other Businesses. Revenues from the
Fiber-based Products business decreased $0.4 million, or 13%, to $2.6 million in
the first quarter of 2008 from $3.0 million in the first quarter of
2007 primarily due to weaker sales of Biodac™ due to
increased competition. Revenues from our Casting Products business decreased
$1.2 million, or 100%, in the first quarter of 2008 compared to the first
quarter of 2007, as a result of its sale in April 2007.
Gross
Profit Margin
Gross profit margins for the first
quarters of 2008 and 2007 are as follows:
|
|
|
Three
Months Ended
|
|
|
|
|
March
29,
|
|
|
March
31,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
Gross
Profit Margin:
|
|
|
|
|
|
|
|
Pulp and Papermaking
Systems
|
|
|
40 |
% |
|
|
37 |
% |
|
Other
|
|
|
39 |
|
|
|
34 |
|
|
|
|
|
40 |
% |
|
|
37 |
% |
Gross profit margin increased
to 40% in the first quarter of 2008 from 37% in the first quarter of
2007.
Papermaking Systems Segment. The gross profit
margin in the Papermaking Systems segment increased to 40% in the first quarter
of 2008 from 37% in the first quarter of 2007. This increase was primarily due
to higher margins from capital projects in our stock-preparation equipment
product line, as well as higher margins from both capital and aftermarket
products in our water-management product line.
Other Businesses. The gross profit margin
in our other businesses increased to 39% in the first quarter of 2008 from 34%
in the first quarter of 2007 primarily due to the sale of our lower-margin
Casting Products business in April 2007. This increase was offset in part by
lower gross profit margins in our Fiber-based Products business in the
first quarter of 2008 compared to the first quarter of 2007 primarily resulting
from the decrease in revenues and, to a lesser extent, an increase in the cost
of natural gas.
Operating
Expenses
Selling, general, and administrative
expenses as a percentage of revenues increased to 30% in the first quarter
of 2008 from 27% in the first quarter of 2007 primarily resulting from a $1.4
million increase from the unfavorable effect of foreign currency translation and
a $2.3 million decrease in revenues. Selling, general, and administrative
expenses increased $1.9 million, or 8%, to $25.4 million in the first quarter of
2008 from $23.5 million in the first quarter of 2007 primarily due to an
increase of $1.4 million, or 6%, from the unfavorable effect of foreign currency
translation in the Papermaking Systems segment, as well as additional non-cash
employee equity compensation expense of $0.5 million that was not incurred in
the first quarter of 2007.
Total stock-based compensation expense
was $0.7 million and $0.2 million in the first quarters of 2008 and 2007,
respectively, and is included in selling, general, and administrative expenses.
As of March 29, 2008, unrecognized compensation cost related to stock options
and restricted stock awards was approximately $6.9 million, which will be
recognized over a weighted average period of 2.4 years.
Results
of Operations (continued)
We expect selling, general, and
administrative expenses to increase in subsequent quarters as we incur costs to
defend ourselves and other indemnified parties in litigation related to our
discontinued operation. See Part II, Item 1, “Legal Proceedings,” for
further information.
Research and development expenses
decreased $0.1 million to $1.6 million in the first quarter of 2008 compared to
$1.7 million in the first quarter of 2007 and represented 2% of revenues in both
periods.
Other Income and Restructuring Costs,
Net
We recorded net other income and
restructuring costs of $0.5 million in the first quarter of 2008. Other income
consisted of a pre-tax gain of $0.6 million ($0.4 million after-tax, or $.03 per
diluted share) in the first quarter of 2008 resulting from the sale of land in
France for $0.7 million in cash. The restructuring costs consisted of severance
charges of $0.1 million related to the closure of a facility in Sweden that
resulted in the reduction of 3 full-time positions. Both of these items occurred
in the Papermaking Systems segment.
Interest
Income
Interest income increased to $0.5
million in the first quarter of 2008 from $0.4 million in the first quarter
of 2007 primarily due to higher invested balances.
Interest
Expense
Interest expense was $0.6 million in
the first quarter of 2008 compared to $0.8 million in the first quarter of 2007
primarily due to lower average outstanding borrowings during the first quarter
of 2008 compared to 2007.
Provision
for Income Taxes
Our effective tax rates were 30%
and 32% in the first quarters of 2008 and 2007, respectively. The 2% decrease in
our effective tax rate is primarily due to a greater portion of our operating
profits occurring in lower tax jurisdictions in 2008 compared to
2007.
Income
from Continuing Operations
Income from continuing operations
increased to $5.1 million in the first quarter of 2008 from $4.7 million in the
first quarter of 2007, an increase of $0.4 million, or 9%. The increase in the
2008 period was primarily due to a decrease in net interest expense of $0.4
million and an increase in operating income of $0.2 million (see Revenues and Gross Profit Margin discussed
above), offset in part by an increase in provision for income taxes of $0.1
million.
Loss
from Discontinued Operation
The loss from discontinued
operation decreased $0.4 million in the first quarter of 2008 compared to
the first quarter of 2007 primarily due to a pre-tax decrease of $0.6 million in
warranty costs.
As of
March 29, 2008, the accrued warranty costs associated with the composites
business were $2.1 million, which represents the low end of the estimated range
of warranty reserve required to be recorded under SFAS 5 based on the level of
claims received through the end of the first quarter of 2008. Composites LLC has
calculated that the total potential warranty cost ranges from $2.1 million to
approximately $13.1 million. The high end of the range represents the estimated
maximum level of warranty claims remaining based on the total sales of the
products under warranty.
Composites
LLC retained all of the cash proceeds received from the asset sale in October
2005 and continued to administer and pay warranty claims from the sale proceeds
into the third quarter of 2007. On September 30, 2007, Composites LLC
announced that it no longer had sufficient funds to honor warranty claims, was
unable to pay or process warranty claims, and ceased doing business. Composites
LLC will continue to record adjustments to accrued warranty costs to reflect the
minimum amount of the potential range of loss for products under warranty based
on judgments known to be entered against it in litigation, if any. Our
consolidated results in future reporting periods will be negatively impacted if
the future level of warranty claims exceeds the warranty reserve. See Part II,
Item 1, “Legal Proceedings,” for pending litigation related to the composites
business.
Results
of Operations (continued)
Recent
Accounting Pronouncements
In
February 2007, the FASB issued SFAS No. 159 (SFAS 159), “The Fair Value
Option for Financial Assets and Financial Liabilities—including an Amendment of
FASB Statement No. 115.” SFAS 159 permits entities to measure eligible
financial assets, financial liabilities and certain other assets and
liabilities at fair value on an instrument-by-instrument basis. The fair
value measurement election is irrevocable once made and subsequent changes in
fair value must be recorded in earnings. The effect of adoption will be
reported as a cumulative-effect adjustment to beginning retained earnings. We
adopted SFAS 159 in the first quarter of 2008, which did not have an effect
on our consolidated financial position or results of operations.
In
December 2007, the FASB issued SFAS No. 141(R), “Business
Combinations” (SFAS 141(R)), which replaces SFAS No. 141.
SFAS No. 141(R) requires an acquirer to recognize the assets acquired,
the liabilities assumed, any non-controlling interest in the acquiree, and any
goodwill acquired to be measured at their fair values at the acquisition date.
SFAS 141(R) also establishes disclosure requirements, which will enable users to
evaluate the nature and financial effects of the business combination.
SFAS 141(R) is effective for fiscal years beginning after December 15,
2008. The adoption of SFAS 141(R) will have an impact on accounting for
business combinations completed subsequent to its adoption and for certain
transactions prior to adoption. As of March 29, 2008, we had a valuation
allowance of $1.3 million relating to the Kadant Johnson acquisition, a
liability for unrecognized tax benefits of $0.5 million, and accrued interest
and penalties of $0.8 million, all of which would affect goodwill, if
recognized. However, if those tax benefits are recognized after the adoption of
SFAS No. 141(R), the amounts would instead have an effect on our
annual effective tax rate.
In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests
in Consolidated Financial Statements—an amendment of Accounting Research
Bulletin No. 51” (SFAS 160), which establishes accounting and
reporting standards for ownership interests in subsidiaries held by parties
other than the parent, the amount of consolidated net income attributable to the
parent and to the noncontrolling interest, changes in a parent’s ownership
interest and the valuation of retained non-controlling
equity
investments when a subsidiary is deconsolidated. SFAS 160 also establishes
reporting requirements that provide sufficient disclosures that clearly identify
and distinguish between the interests of the parent and the interests of the
non-controlling owners. SFAS 160 is effective for fiscal years beginning
after December 15, 2008. We are currently evaluating the effect that SFAS
160 will have on our consolidated financial statements.
In March 2008, the FASB
issued SFAS No. 161, "Disclosures about Derivative Instruments and Hedging
Activities" (SFAS 161). SFAS 161 requires disclosures of how and why an entity
uses derivative instruments, how derivative instruments and related hedged items
are accounted for and how derivative instruments and related hedged items affect
an entity's financial position, financial performance and cash flows. SFAS 161
is effective for fiscal years beginning after November 15, 2008. We
are currently evaluating the effect that SFAS 161 will have on our
consolidated financial statements.
Liquidity
and Capital Resources
Consolidated working capital, including
the discontinued operation, was $118.3 million at March 29, 2008, compared with
$107.5 million at December 29, 2007. Included in working capital are cash and
cash equivalents of $58.5 million at March 29, 2008, compared with $61.6 million
at December 29, 2007. At March 29, 2008, $52.4 million of cash and cash
equivalents were held by our foreign subsidiaries.
First
Quarter 2008
Our operating activities provided cash
of $6.3 million in the first quarter of 2008 related
primarily to our continuing operations. The cash provided by our
continuing operations in the first quarter of 2008 was primarily due to income
from continuing operations of $5.1 million, a decrease in accounts receivable of
$8.3 million, and a non-cash charge of $1.9 million for depreciation and
amortization expense. These sources of cash in the first quarter of 2008 were
offset in part by a decrease in other current liabilities of $5.6 million and
an increase in inventories of $4.5 million. The decrease in other current
liabilities of $5.6 million was primarily due to a decrease of $4.1 million in
accrued payroll and employee benefits primarily related to incentive payments
made in the first quarter of 2008.
Our investing activities used cash of
$1.9 million in the first quarter of 2008 related entirely to our
continuing operations. We used cash of $1.6 million to purchase property, plant,
and equipment and $1.2 million of cash for additional consideration associated
with the acquisition of Jining Huayi Light Industry Machinery Co., Ltd. We
received cash of $0.9 million from the sale of property, plant, and
equipment.
Liquidity
and Capital Resources (continued)
Our financing activities used cash of
$9.9 million in the first quarter of 2008 related entirely to our continuing
operations. We used cash of $26.0 million in the first quarter of 2008 to repay
our outstanding long-term obligations, as well as $12.0 million to repurchase
our common stock on the open market. These uses of cash were largely offset
by $28.0 million of cash proceeds received from the issuance of long-term
obligations as further described below under Revolving Credit
Facility.
First
Quarter 2007
Our operating activities provided cash
of $5.9 million in the first quarter of 2007, including $6.5 million provided by
our continuing operations and $0.6 million used by the discontinued operation.
The cash provided by our continuing operations in the first quarter of 2007 was
primarily due to income from continuing operations of $4.7 million, an increase
in accounts payable of $3.4 million, a decrease in unbilled costs and fees
of $3.2 million, and a non-cash charge of $1.8 million for depreciation and
amortization expense. These sources of cash in the first quarter of 2007 were
offset in part by a decrease in other current liabilities of $6.3 million and
an increase in other current assets of $1.1 million. The decrease in other
current liabilities of $6.3 million was primarily due to a decrease of $4.0
million in accrued payroll and employee benefits primarily related to incentive
payments made in the first quarter of 2007.
Our investing activities used cash of
$0.6 million in the first quarter of 2007 related primarily to our
continuing operations, which used cash of $0.8 million to purchase property,
plant, and equipment.
Our financing activities used cash of
$4.4 million in the first quarter of 2007 related entirely to our continuing
operations. We used cash of $3.8 million in the first quarter of 2007 to
repurchase our common stock on the open market, and we used $1.9 million for
principal payments on our term loan. We received $1.0 million of proceeds
from the issuance of common stock in connection with the exercise of employee
stock options.
Revolving
Credit Facility
On
February 13, 2008, we entered into a five-year unsecured revolving credit
facility (2008 Credit Agreement) in the aggregate principal amount of up to $75
million, which includes an uncommitted unsecured incremental borrowing facility
of up to an additional $75 million. We can borrow up to $75 million under the
2008 Credit Agreement with a sublimit of $60 million within the 2008 Credit
Agreement available for the issuances of letters of credit and bank guarantees.
The principal on any borrowings made under the 2008 Credit Agreement is due on
February 13, 2013. Interest on any loans outstanding under the 2008 Credit
Agreement accrues and is payable quarterly in arrears at one of the following
rates selected by us: (a) the prime rate plus an applicable margin (up to
..20%) or (b) a Eurocurrency rate plus an applicable margin (up to 1.20%).
The applicable margin is determined based upon our total debt to earnings before
interest, taxes, depreciation and amortization (EBITDA) ratio. In the first
quarter of 2008, we borrowed $28 million under the 2008 Credit Agreement and
applied the majority of the proceeds to repay $26 million of our
outstanding debt.
Our
obligations under the 2008 Credit Agreement may be accelerated upon the
occurrence of an event of default under the 2008 Credit Agreement, which
includes customary events of default including without limitation payment
defaults, defaults in the performance of affirmative and negative covenants, the
inaccuracy of representations or warranties, bankruptcy and insolvency related
defaults, defaults relating to such matters as the Employment Retirement Income
Security Act (ERISA), uninsured judgments and the failure to pay certain
indebtedness, and a change of control default.
The loans
under the 2008 Credit Agreement are guaranteed by certain of our domestic
subsidiaries pursuant to the Guarantee Agreement effective as of
February 13, 2008. In addition, the 2008 Credit Agreement contains negative
covenants applicable to us and our subsidiaries, including financial covenants
requiring us to comply with a maximum consolidated leverage ratio of 3.5 and a
minimum consolidated fixed charge coverage ratio of 1.2, and restrictions on
liens, indebtedness, fundamental changes, dispositions of property, making
certain restricted payments (including dividends and stock repurchases),
investments, transactions with affiliates, sale and leaseback transactions, swap
agreements, changing our fiscal year, arrangements affecting subsidiary
distributions, entering into new lines of business, and certain actions related
to the discontinued operation. As of March 29, 2008, we were in compliance
with these covenants.
Liquidity
and Capital Resources (continued)
The
amount we are able to borrow under the 2008 Credit Agreement is the total
borrowing capacity less any outstanding borrowings, letters of credit and
multi-currency borrowings issued under the 2008 Credit Agreement. As of March
29, 2008, we had $42.6 million of borrowing capacity available under the
committed portion of the 2008 Credit Agreement.
Commercial
Real Estate Loan
On
May 4, 2006, we borrowed $10 million under a promissory note (2006
Commercial Real Estate Loan), which is repayable in quarterly installments of
$125 thousand over a ten-year period with the remaining principal balance of $5
million due upon maturity. Interest on the 2006 Commercial Real Estate Loan
accrues and is payable quarterly in arrears at one of the following rates
selected by us (a) the prime rate or (b) the three-month London
Inter-Bank Offered Rate (LIBOR) plus a 1% margin. Effective February 14,
2008, this margin was lowered to .75%. The 2006 Commercial Real Estate Loan is
guaranteed and secured by real estate and related personal property of us and
certain of our domestic subsidiaries, located in Theodore, Alabama; Auburn,
Massachusetts; Three Rivers, Michigan; and Queensbury, New York, pursuant to
mortgage and security agreements dated May 4, 2006 (Mortgage and Security
Agreements).
Our
obligations under the 2006 Commercial Real Estate Loan may be accelerated upon
the occurrence of an event of default under the 2006 Commercial Real Estate Loan
and the Mortgage and Security Agreements, which includes customary events of
default including without limitation payment defaults, defaults in the
performance of covenants and obligations, the inaccuracy of representations or
warranties, bankruptcy- and insolvency-related defaults, liens on the properties
or collateral and uninsured judgments. In addition, the occurrence of an event
of default under the 2008 Credit Agreement or any successor credit facility
would be an event of default under the 2006 Commercial Real Estate
Loan.
Kadant
Jining Acquisition, Loan, and Credit Facilities
In 2006,
our Kadant Jining subsidiary acquired Huayi for approximately $21.2 million, net
of assumed liabilities of $2.3 million. Of the total consideration, $17.3
million was paid in cash, including $1.0 million for acquisition-related costs.
Of the remaining purchase obligation totaling $3.8 million, $2.4 million was
paid in 2007, $1.2 million was paid in the first quarter of 2008 and the
remainder will be paid in 2008 if certain indemnification obligations are
satisfied.
On
January 28, 2008, our Kadant Jining subsidiary borrowed 40 million Chinese
renminbi, or approximately $5.7 million at the March 29, 2008 exchange rate
(2008 Kadant Jining Loan). Principal on the 2008 Kadant Jining Loan is due as
follows: 24 million Chinese renminbi, or approximately $3.4 million, on January
28, 2010 and 16 million Chinese renminbi, or approximately $2.3 million, on
January 28, 2011. Interest on the 2008 Kadant Jining Loan accrues and is payable
quarterly in arrears based on 95% of the interest rate published by The People’s
Bank of China for a loan of the same term. The proceeds from the 2008 Kadant
Jining Loan were used to repay outstanding debt totaling 40 million Chinese
renminbi.
On July
30, 2007, our Kadant Jining subsidiary and our Kadant Pulp and Paper Equipment
Light Machinery Co., Ltd. subsidiary (Kadant Yanzhou) each entered into a
short-term credit line facility agreement (Facilities) that would allow Kadant
Jining to borrow up to an aggregate principal amount of 45 million Chinese
renminbi, or approximately $6.4 million as of March 29, 2008, and Kadant Yanzhou
to borrow up to an aggregate principal amount of 15 million Chinese renminbi, or
approximately $2.1 million as of March 29, 2008. Both credit facilities have a
term of 364 days. Borrowings made under the Facilities will bear interest at 90%
of the applicable short-term interest rate for a Chinese renminbi loan of
comparable term as published by The People’s Bank of China. The Facilities will
be used for general working capital purposes. We have provided a guaranty, dated
July 30, 2007, securing the payment of all obligations made under the Facilities
and providing a cross-default to our other senior indebtedness, including the
2008 Credit Agreement. As of March 29, 2008, there were no outstanding
borrowings under these credit facilities.
Liquidity
and Capital Resources (continued)
Interest
Rate Swap Agreements
To hedge the exposure to movements in
the 3-month LIBOR rate on outstanding debt, on February 13, 2008, we entered
into a swap agreement (2008 Swap Agreement). The 2008 Swap Agreement has a
five-year term and a $15 million notional value, which decreases to $10 million
on December 31, 2010, and $5 million on December 30, 2011. Under the 2008 Swap
Agreement, on a quarterly basis we will receive a 3-month LIBOR rate and pay a
fixed rate of interest of 3.265%. We also entered into a swap agreement in 2006
(2006 Swap Agreement) to hedge the exposure to movements in the variable
interest rate on a portion of our outstanding debt. The 2006 Swap Agreement has
the same terms and quarterly payment dates as the corresponding debt, and
reduces proportionately in line with the amortization of the debt. As of March
29, 2008, $24.3 million, or 56%, of our outstanding debt was hedged through
interest rate swap agreements. Our management believes that any credit risk
associated with the 2006 and 2008 Swap Agreements is remote based on the
creditworthiness of the financial institution issuing the swap
agreements.
Additional
Liquidity and Capital Resources
On May 2, 2007, our board of directors
approved the repurchase by us of up to $20 million of our equity securities
during the period from May 2, 2007 through May 2, 2008. As of March 29,
2008, we had repurchased 450,600 shares of our common stock for $12.0 million in
the first quarter of 2008 under this authorization. On May 5, 2008, our board of
directors approved the repurchase by us of up to $30 million of our equity
securities during the period from May 5, 2008 through May 5, 2009. Repurchases
under these authorizations may be made in public or private transactions,
including under Securities Exchange Act Rule 10b-5-1 trading plans.
It is our practice to reinvest
indefinitely the earnings of our international subsidiaries, except in instances
in which we can remit such earnings without a significant associated tax cost.
Through March 29, 2008, we have not provided for U.S. income taxes on
approximately $83.9 million of unremitted foreign earnings. The U.S. tax cost
has not been determined due to the fact that it is not practicable to estimate
at this time. The related foreign tax withholding, which would be required if we
remitted the foreign earnings to the U.S., would be approximately $2.9
million.
On October 21, 2005, Composites
LLC sold its composites business, presented as a discontinued operation in the
accompanying condensed consolidated financial statements. Under the terms of the
asset purchase agreement, Composites LLC retained certain liabilities associated
with the operation of the business prior to the sale, including warranty
obligations related to products manufactured prior to the sale date. Composites
LLC retained all of the cash proceeds received from the asset sale and continued
to administer and pay warranty claims from the sale proceeds into the third
quarter of 2007. On September 30, 2007, Composites LLC announced that it no
longer had sufficient funds to honor warranty claims, was unable to pay or
process warranty claims, and ceased doing business. At March 29, 2008, the
accrued warranty costs for Composites LLC were $2.1 million. See Part II, Item
1, “Legal Proceedings,” for further information.
Although we currently have no material
commitments for capital expenditures, we plan to make expenditures of
approximately $7 million during the remainder of 2008 for property, plant, and
equipment.
In the future, our liquidity position
will be primarily affected by the level of cash flows from operations, cash paid
to satisfy debt repayments, capital projects, stock repurchases, or additional
acquisitions, if any. We believe that our existing resources, together with the
cash available from our credit facilities and the cash we expect to generate
from continuing operations, will be sufficient to meet the capital requirements
of our current operations for the foreseeable future.
Item 3 – Quantitative and
Qualitative Disclosures About Market Risk
Our exposure to market risk from
changes in interest rates and foreign currency exchange rates has not changed
materially from our exposure at year-end 2007 as disclosed in Item 7A of our
Annual Report on Form 10-K for the fiscal year ended December 29, 2007 filed
with the SEC.
Item 4 – Controls and
Procedures
(a) Evaluation
of Disclosure Controls and Procedures
Our
management, under the supervision and with the participation of our Chief
Executive Officer and Chief Financial Officer, evaluated the effectiveness of
our disclosure controls and procedures as of March 29, 2008. The term
“disclosure controls and procedures,” as defined in Securities Exchange Act
Rules 13a-15(e) and 15d-15(e), means controls and other procedures of a company
that are designed to ensure that information required to be disclosed by the
company in the reports that it files or submits under the Exchange Act is
recorded, processed, summarized, and reported, within the time periods specified
in the SEC’s rules and forms. Disclosure controls and procedures include,
without limitation, controls and procedures designed to ensure that information
required to be disclosed by a company in the reports that it files or submits
under the Exchange Act is accumulated and communicated to the company’s
management, including its principal executive and principal financial officers,
as appropriate to allow timely decisions regarding required disclosure.
Management recognizes that any controls and procedures, no matter how
well
designed and operated, can provide only reasonable assurance of achieving their
objectives, and management necessarily applies its judgment in evaluating the
cost-benefit relationship of possible controls and procedures. Based upon the
evaluation of our disclosure controls and procedures as of March 29, 2008, our
Chief Executive Officer and Chief Financial Officer concluded that as of March
29, 2008, our disclosure controls and procedures were effective at the
reasonable assurance level.
(b)
Changes in Internal Control Over Financial Reporting
There have not been any changes
in our internal control over financial reporting (as defined in Rules 13a-15(f)
and 15d-15(f) under the Securities Exchange Act of 1934, as amended) during the
fiscal quarter ended March 29, 2008 that has materially affected, or is
reasonably likely to materially affect, our internal control over financial
reporting.
PART
II – OTHER INFORMATION
Item 1 – Legal
Proceedings
We have
been named as a co-defendant, together with Composites LLC and another
defendant, in a consumer class action lawsuit filed in the United States
District Court for the District of Massachusetts on behalf of a putative class
of individuals who own GeoDeck™ decking or railing products manufactured by
Composites LLC between April 2002 and October 2003. The complaint in this matter
purports to assert, among other things, causes of action for unfair and
deceptive trade practices, fraud, negligence, breach of warranty and unjust
enrichment, and it seeks compensatory damages and punitive damages under various
state consumer protection statutes, which plaintiffs claim exceed $50 million.
We intend to defend against this action vigorously, but there is no assurance we
will prevail in such defense. On March 14, 2008, we, Composites LLC, and the
other co-defendants filed motions to dismiss all counts in the complaint, which
is currently pending. We could incur substantial costs to defend ourselves in
this lawsuit and a judgment or a settlement of the claims against the defendants
could have a material adverse impact on our consolidated financial results. We
have not made an accrual related to this litigation as we believe that an
adverse outcome is not probable and estimable at this time.
Item 1A – Risk
Factors
In
connection with the “safe harbor” provisions of the Private Securities
Litigation Reform Act of 1995, we wish to caution readers that the following
important factors, among others, in some cases have affected, and in the future
could affect, our actual results and could cause our actual results in 2008 and
beyond to differ materially from those expressed in any forward-looking
statements made by us, or on our behalf.
Our
business is dependent on the condition of the pulp and paper
industry.
We sell
products primarily to the pulp and paper industry, which is a cyclical industry.
Generally, the financial condition of the global pulp and paper industry
corresponds to the condition of the general economy, as well as to a number of
other factors, including pulp and paper production capacity relative to demand.
In recent years, the paper industry in certain geographic regions, notably
Europe and North America, has undergone a number of structural changes,
including decreased spending, mill closures, consolidations, and bankruptcies,
all of which have adversely affected our business. In addition, paper producers
have been and continue to be negatively affected by higher operating costs,
especially higher energy and chemical costs. We believe paper companies remain
cautious about increasing their capital and operating spending in the current
market environment. As paper companies consolidate in response to market
weakness, they frequently reduce capacity and postpone or even cancel capacity
addition or expansion projects. These actions can adversely affect our revenue
and profitability globally or in a particular region or product
line.
A
significant portion of our international sales has, and may in the future, come
from China and we operate several manufacturing facilities in China, which
exposes us to political, economic, operational and other risks.
We have
significant revenues from China, operate significant facilities in China, and
expect to manufacture and source more of our equipment and components from China
in the future. During the first quarters of 2008 and 2007, approximately $14.3
million, or 17%, and $16.5 million, or 19%, respectively, of our total revenues
were from customers in China. Our manufacturing facilities in China, as well as
the significant level of revenues from China, expose us to increased risk in the
event of changes in the policies of the Chinese government, political unrest,
unstable economic conditions, or other developments in China or in U.S.-China
relations that are adverse to trade, including enactment of protectionist
legislation or trade or currency restrictions. In addition, orders from
customers in China, particularly for large stock-preparation systems that have
been tailored to a customer’s specific requirements, have credit risks higher
than we generally incur elsewhere, and some orders are subject to the receipt of
financing approvals from the Chinese government. For this reason, we do not
record signed contracts from customers in China for large stock-preparation
systems as orders until we receive the down payments for such contracts. The
timing of the receipt of these orders and the down payments are uncertain and
there is no assurance that we will be able to recognize revenue on these
contracts. We may experience a loss if the contract is cancelled prior to the
receipt of a down payment in the event we commence engineering or other work
associated with the contract. In addition, we may experience a loss if the
contract is cancelled prior to the receipt of a letter of credit covering the
remaining balance of the contract. Typically, the letter of credit represents
80% or more of the total order.
Our
business is subject to economic, currency, political, and other risks associated
with international sales and operations.
During
the first quarters of 2008 and 2007, approximately 59% and 61% of our sales,
respectively, were to customers outside the United States, principally in China
and Europe. In addition, we operate several manufacturing operations worldwide,
including those in China, Mexico, and Brazil. International revenues and
operations are subject to a number of risks, including the
following:
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agreements
may be difficult to enforce and receivables difficult to collect through a
foreign country’s legal system,
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foreign
customers may have longer payment
cycles,
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foreign
countries may impose additional withholding taxes or otherwise tax our
foreign income, impose tariffs, adopt other restrictions on foreign trade,
impose currency restrictions or enact other protectionist or anti-trade
measures,
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it
may be difficult to repatriate funds, due to unfavorable tax consequences
or other restrictions or limitations imposed by foreign governments,
and
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the
protection of intellectual property in foreign countries may be more
difficult to enforce.
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Although
we seek to charge our customers in the same currency in which our operating
costs are incurred, fluctuations in currency exchange rates may affect product
demand and adversely affect the profitability in U.S. dollars of products we
provide in international markets where payment for our products and services is
made in their local currencies. In addition, our inability to repatriate funds
could adversely affect our ability to service our debt obligations. Any of these
factors could have a material adverse impact on our business and results of
operations.
We
are subject to intense competition in all our markets.
We
believe that the principal competitive factors affecting the markets for our
products include quality, price, service, technical expertise, and product
innovation. Our competitors include a number of large multinational corporations
that may have substantially greater financial, marketing, and other resources
than we do. As a result, they may be able to adapt more quickly to new or
emerging technologies and changes in customer requirements, or to devote greater
resources to the promotion and sale of their services and products. Competitors’
technologies may prove to be superior to ours. Our current products, those under
development, and our ability to develop new technologies may not be sufficient
to enable us to compete effectively. Competition, especially in China, has
increased as new companies enter the market and existing competitors expand
their product lines and manufacturing operations.
Our
debt may adversely affect our cash flow and may restrict our investment
opportunities.
In 2008,
we entered into a five-year unsecured revolving credit facility (2008 Credit
Agreement) in the aggregate principal amount of up to $75 million, which
includes an uncommitted unsecured incremental borrowing facility of up to an
additional $75 million. We borrowed $28 million under the 2008 Credit Agreement
in the first quarter of 2008 and we have also borrowed additional amounts under
other agreements to fund acquisitions and grow our business. We may also obtain
additional long-term debt and working capital lines of credit to meet future
financing needs, which would have the effect of increasing our total
leverage.
Our
indebtedness could have negative consequences, including:
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increasing
our vulnerability to adverse economic and industry
conditions,
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limiting
our ability to obtain additional
financing,
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limiting
our ability to pay dividends on or to repurchase our capital
stock,
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limiting
our ability to acquire new products and technologies through acquisitions
or licensing agreements, and
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limiting
our flexibility in planning for, or reacting to, changes in our business
and the industries in which we
compete.
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Our
existing indebtedness bears interest at floating rates and as a result, our
interest payment obligations on our indebtedness will increase if interest rates
increase. To reduce the exposure to floating rates, $24.3 million, or 56%, of
our outstanding floating rate debt as of March 29, 2008 was hedged through
interest rate swap agreements.
Our
ability to satisfy our obligations and to reduce our total debt depends on our
future operating performance and on economic, financial, competitive, and other
factors beyond our control. Our business may not generate sufficient cash flows
to meet these obligations or to successfully execute our business strategy. If
we are unable to service our debt and fund our business, we may be forced to
reduce or delay capital expenditures or research and development expenditures,
seek additional financing or equity capital, restructure or refinance our debt,
or sell assets. We may not be able to obtain additional financing or refinance
existing debt or sell assets on terms acceptable to us or at
all.
Restrictions
in our 2008 Credit Agreement may limit our activities.
Our 2008
Credit Agreement contains, and future debt instruments to which we may become
subject may contain, restrictive covenants that limit our ability to engage in
activities that could otherwise benefit us, including restrictions on our
ability and the ability of our subsidiaries to:
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incur
additional indebtedness,
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pay
dividends on, redeem, or repurchase our capital
stock,
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enter
into transactions with affiliates,
and
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consolidate,
merge, or transfer all or substantially all of our assets and the assets
of our subsidiaries.
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We are
also required to meet specified financial ratios under the terms of our 2008
Credit Agreement. Our ability to comply with these financial restrictions and
covenants is dependent on our future performance, which is subject to prevailing
economic conditions and other factors, including factors that are beyond our
control such as currency exchange rates, interest rates, changes in technology,
and changes in the level of competition.
Our
failure to comply with any of these restrictions or covenants may result in an
event of default under our 2008 Credit Agreement and other loan obligations,
which could permit acceleration of the debt under those instruments and require
us to repay the debt before its scheduled due date.
If an
event of default occurs, we may not have sufficient funds available to make the
payments required under our indebtedness. If we are unable to repay amounts owed
under our debt agreements, those lenders may be entitled to foreclose on and
sell the collateral that secures our borrowings under the
agreements.
The
inability of Kadant Composites LLC to pay claims against it has exposed us to
litigation, which if we are unable to successfully defend, could have a material
adverse effect on our condensed consolidated financial results.
On
October 21, 2005, our Kadant Composites LLC subsidiary (Composites LLC)
sold substantially all of its assets to LDI Composites Co. (Buyer) for
approximately $11.9 million in cash and the assumption of $0.7 million of
liabilities, resulting in a cumulative loss on sale of $0.1 million. Under the
terms of the asset purchase agreement, Composites LLC retained certain
liabilities associated with the operation of the business prior to the sale,
including warranty obligations related to products manufactured prior to the
sale date (Retained Liabilities), and, jointly and severally with its parent
company Kadant Inc., agreed to indemnify the Buyer against losses caused to the
Buyer arising from claims associated with the Retained Liabilities. The
indemnification obligation is contractually limited to approximately $8.9
million. All activity related to this business is classified in the results of
the discontinued operation in our condensed consolidated financial
statements.
Composites
LLC retained all of the cash proceeds received from the asset sale and continued
to administer and pay warranty claims from the sale proceeds into the third
quarter of 2007. On September 30, 2007, Composites LLC announced that it no
longer had sufficient funds to honor warranty claims, was unable to pay or
process warranty claims, and ceased doing business. We are now co-defendants in
a purported consumer class action, together with Composites LLC and another
defendant, arising from these warranty claims. In subsequent disclosures in this
litigation, plaintiffs claim that such damages exceed $50 million. We could
incur substantial costs to defend ourselves and the Buyer under our
indemnification obligations in this lawsuit and a judgment or a settlement of
the claims against the defendants could have a material adverse impact on our
consolidated financial results. For more information regarding our current
litigation, see Part II, Item 1, “Legal Proceedings.” There also can be no
assurance that creditors or other claimants against Composites LLC will not seek
other parties, including us, against whom to assert claims. While we believe any
such asserted or possible claims against us or the Buyer would be without merit,
the cost of litigation and the outcome, if we were unable to successfully defend
such claims, could adversely affect our condensed consolidated financial
results.
An
increase in the accrual for warranty costs of the discontinued operation
adversely affects our condensed consolidated financial results.
The
discontinued operation has experienced significant liabilities associated with
warranty claims related to its composite decking products manufactured prior to
the sale date. The accrued warranty costs of the discontinued operation are
estimated for accounting purposes based on the level of claims processed (see
Discontinued Operation
in the Overview section for a detailed description of the methodology used). The
accrued warranty costs of the discontinued operation as of March 29, 2008
represents the low end of the estimated range of warranty costs required to be
recorded under SFAS 5 based on the level of claims received through the end of
the first quarter of 2008. Composites LLC has calculated that the total
potential warranty cost ranges from $2.1 million to
approximately
$13.1 million. The high end of the range represents the estimated maximum level
of warranty claims remaining based on the total sales of the products under
warranty. On September 30, 2007, the discontinued operation ceased doing
business and has no employees or other service providers to collect or process
warranty claims. Composites LLC will continue to record adjustments to accrued
warranty costs to reflect the minimum amount of the potential range of loss for
products under warranty based on judgments entered against it in litigation,
which will adversely affect our consolidated results.
Our
inability to successfully identify and complete acquisitions or successfully
integrate any new or previous acquisitions could have a material adverse effect
on our business.
Our
strategy includes the acquisition of technologies and businesses that complement
or augment our existing products and services. Our most recent acquisition was
the Kadant Jining acquisition in June 2006. Any such acquisition involves
numerous risks that may adversely affect our future financial performance and
cash flows. These risks include:
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competition
with other prospective buyers resulting in our inability to complete an
acquisition or in us paying substantial premiums over the fair value of
the net assets of the acquired
business,
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inability
to obtain regulatory approval, including antitrust
approvals,
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difficulty
in assimilating operations, technologies, products and the key employees
of the acquired business,
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inability
to maintain existing customers or to sell the products and services of the
acquired business to our existing
customers,
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diversion
of management’s attention away from other business
concerns,
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inability
to improve the revenues and profitability or realize the cost savings and
synergies expected in the
acquisition,
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assumption
of significant liabilities, some of which may be unknown at the
time,
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potential
future impairment of the value of goodwill and intangible assets acquired,
and
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identification
of internal control deficiencies of the acquired
business.
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We
may be required to reorganize our operations in response to changing conditions
in the paper industry, and such actions may require significant expenditures and
may not be successful.
In the
past, we have undertaken various restructuring measures in response to changing
market conditions in the paper industry and their effect on our business. We may
engage in additional cost reduction programs in the future. We may not recoup
the costs of programs we have already initiated, or other programs in which we
may decide to engage in the future, the costs of which may be significant. In
connection with any future plant closures, delays or failures in the transition
of production from existing facilities to our other facilities in other
geographic regions could also adversely affect our results of operations. In
addition, our profitability may decline if our restructuring efforts do not
sufficiently reduce our future costs and position us to maintain or increase our
sales.
Our
fiber-based products business is subject to a number of factors that may
adversely influence its profitability, including high costs of natural gas and
dependence on a few suppliers of raw materials.
We use
natural gas in the production of our fiber-based granular products, the price of
which is subject to fluctuation. We seek to manage our exposure to natural gas
price fluctuations by entering into short-term forward contracts to purchase
specified quantities of natural gas from a supplier. We may not be able to
effectively manage our exposure to natural gas price fluctuations. Higher costs
of natural gas will adversely affect our consolidated results if we are unable
to effectively manage our exposure or pass these costs on to customers in the
form of surcharges.
We are
dependent on three paper mills for the fiber used in the manufacture of our
fiber-based granular products. These mills have the exclusive right to supply
the papermaking byproducts used in the manufacturing process. Due to process
changes at the mills, we have experienced some difficulty obtaining sufficient
raw material to operate at optimal production levels. We continue to work with
the mills to ensure a stable supply of raw material. To date, we have been able
to meet all of our customer delivery requirements, but there can be no assurance
that we will be able to meet future delivery requirements. Although we believe
our relationship with the mills is good, the mills could decide not to renew the
contracts when they expire at the end of 2009, or may not agree to renew on
commercially reasonable terms. If the mills were unable or unwilling to supply
us sufficient fiber, we would be forced to find an alternative supply for this
raw material. We may be unable to find an alternative supply on commercially
reasonable terms or could incur excessive transportation costs if an alternative
supplier were found, which would increase our manufacturing costs, and might
prevent prices for our products from being competitive or require closure of the
business.
Our
inability to protect our intellectual property could have a material adverse
effect on our business. In addition, third parties may claim that we infringe
their intellectual property, and we could suffer significant litigation or
licensing expense as a result.
We seek
patent and trade secret protection for significant new technologies, products,
and processes because of the length of time and expense associated with bringing
new products through the development process and into the marketplace. We own
numerous U.S. and foreign patents, and we intend to file additional
applications, as appropriate, for patents covering our products. Patents may not
be issued for any pending or future patent applications owned by or licensed to
us, and the claims allowed under any issued patents may not be sufficiently
broad to protect our technology. Any issued patents owned by or licensed to us
may be challenged, invalidated, or circumvented, and the rights under these
patents may not provide us with competitive advantages. In addition, competitors
may design around our technology or develop competing technologies. Intellectual
property rights may also be unavailable or limited in some foreign countries,
which could make it easier for competitors to capture increased market share. We
could incur substantial costs to defend ourselves in suits brought against us,
including for alleged infringement of third party rights, or in suits in which
we may assert our intellectual property rights against others. An unfavorable
outcome of any such litigation could have a material adverse effect on our
business and results of operations. In addition, as our patents expire, we rely
on trade secrets and proprietary know-how to protect our products. We cannot be
sure the steps we have taken or will take in the future will be adequate to
deter misappropriation of our proprietary information and intellectual property.
Of particular concern are developing countries such as China, where the laws,
courts, and administrative agencies may not protect our intellectual property
rights as fully as in other countries.
We seek
to protect trade secrets and proprietary know-how, in part, through
confidentiality agreements with our collaborators, employees, and consultants.
These agreements may be breached, we may not have adequate remedies for any
breach, and our trade secrets may otherwise become known or be independently
developed by our competitors or our competitors may otherwise gain access to our
intellectual property.
Fluctuations
in our quarterly operating results may cause our stock price to
decline.
Given the
nature of the markets in which we participate and the impact of accounting
standards related to revenue recognition, we may not be able to reliably predict
future revenues and profitability, and unexpected changes may cause us to adjust
our operations. A large proportion of our costs are fixed, due in part to our
significant selling, research and development, and manufacturing costs. Thus,
small declines in revenues could disproportionately affect our operating
results. Other factors that could affect our quarterly operating results
include:
|
|
–
|
failure
of our products to pass contractually agreed upon acceptance tests, which
would delay or prohibit recognition of revenues under applicable
accounting guidelines,
|
|
|
–
|
changes
in the assumptions used for revenue recognized under the
percentage-of-completion method of
accounting,
|
|
|
–
|
failure
of a customer, particularly in China, to comply with an order’s
contractual obligations,
|
|
|
–
|
adverse
changes in demand for and market acceptance of our
products,
|
|
|
–
|
competitive
pressures resulting in lower sales prices for our
products,
|
|
|
–
|
adverse
changes in the pulp and paper
industry,
|
|
|
–
|
delays
or problems in our introduction of new
products,
|
|
|
–
|
delays
or problems in the manufacture of our
products,
|
|
|
–
|
our
competitors’ announcements of new products, services, or technological
innovations,
|
|
|
–
|
contractual
liabilities incurred by us related to guarantees of our product
performance,
|
|
|
–
|
increased
costs of raw materials or supplies, including the cost of
energy,
|
|
|
–
|
changes
in the timing of product orders,
and
|
|
|
–
|
fluctuations
in our effective tax rate.
|
Anti-takeover
provisions in our charter documents, under Delaware law, and in our shareholder
rights plan could prevent or delay transactions that our shareholders may
favor.
Provisions
of our charter and bylaws may discourage, delay, or prevent a merger or
acquisition that our shareholders may consider favorable, including transactions
in which shareholders might otherwise receive a premium for their shares. For
example, these provisions:
|
|
–
|
authorize
the issuance of “blank check” preferred stock without any need for action
by shareholders,
|
|
|
–
|
provide
for a classified board of directors with staggered three-year
terms,
|
|
|
–
|
require
supermajority shareholder voting to effect various amendments to our
charter and bylaws,
|
|
|
–
|
eliminate
the ability of our shareholders to call special meetings of
shareholders,
|
|
|
–
|
prohibit
shareholder action by written consent,
and
|
|
|
–
|
establish
advance notice requirements for nominations for election to our board of
directors or for proposing matters that can be acted on by shareholders at
shareholder meetings.
|
In
addition, our board of directors has adopted a shareholder rights plan intended
to protect shareholders in the event of an unfair or coercive offer to acquire
our company and to provide our board of directors with adequate time to evaluate
unsolicited offers. Preferred stock purchase rights have been distributed to our
common shareholders pursuant to the rights plan. This rights plan may have
anti-takeover effects. The rights plan will cause substantial dilution to a
person or group that attempts to acquire us on terms that our board of directors
does not believe are in our best interests and those of our shareholders and may
discourage, delay, or prevent a merger or acquisition that shareholders may
consider favorable, including transactions in which shareholders might otherwise
receive a premium for their shares.
Item 2 – Unregistered Sales
of Equity Securities and Use of Proceeds
The following table provides
information about purchases by us of our common stock during the first quarter
of 2008:
|
Issuer Purchases of Equity
Securities
|
|
|
Period
|
|
Total
Number of Shares Purchased (1)
|
|
|
Average
Price
Paid
per
Share
|
|
|
Total
Number of Shares Purchased as Part of Publicly Announced Plans (1)
(2)
|
|
|
Approximate
Dollar Value of Shares that May Yet Be
Purchased
Under
the Plans
|
|
|
12/30/07
– 1/31/08
|
|
|
–
|
|
|
|
– |
|
|
|
– |
|
|
$ |
20,000,000 |
|
|
2/1/08
– 2/29/08
|
|
|
218,700
|
|
|
$ |
26.40
|
|
|
|
218,700 |
|
|
$ |
14,225,888 |
|
|
3/1/08
– 3/29/08
|
|
|
231,900 |
|
|
$ |
26.86 |
|
|
|
231,900 |
|
|
$ |
7,996,270 |
|
|
Total:
|
|
|
450,600 |
|
|
$ |
26.64 |
|
|
|
450,600 |
|
|
|
|
|
|
|
|
|
(1)
|
On
May 2, 2007, our board of directors approved the repurchase by us of up to
$20 million of our equity securities during the period from May 2, 2007
through May 2, 2008. Repurchases may be made in public or private
transactions, including under Securities Exchange Act Rule 10b-5-1 trading
plans. As of March 29, 2008, we had repurchased 450,600 shares of our
common stock for $12.0 million in the first quarter of 2008 under this
authorization.
|
|
(2)
|
On
May 5, 2008, our board of directors approved the repurchase by us of up to
$30 million of our equity securities during the period from May 5, 2008
through May 5, 2009. Repurchases may be made in public or private
transactions, including under Securities Exchange Act Rule 10b-5-1 trading
plans.
|
Item 6 –
Exhibits
See Exhibit Index on the page
immediately preceding exhibits, which Exhibit Index is incorporated herein by
reference.
SIGNATURE
Pursuant to the requirements of the
Securities Exchange Act of 1934, the registrant has duly caused this report to
be signed on its behalf by the undersigned thereunto duly authorized as of the
7th day of May, 2008.
|
|
KADANT
INC.
|
|
|
|
|
|
|
|
|
Thomas
M. O’Brien
|
|
|
Executive
Vice President and Chief Financial Officer
|
|
|
(Principal
Financial Officer)
|
EXHIBIT
INDEX
|
Exhibit
|
|
|
|
Number
|
|
Description
of Exhibit
|
|
|
|
|
|
10.1
|
|
Joinder
Agreement, dated as of March 17, 2008, among Kadant Johnson Europe B.V.,
Kadant Inc., JPMorgan Chase Bank, N.A., as administrative agent for the
several banks and other financial institutions from time to time parties
to the Credit Agreement, dated as of February 13, 2008, by and among
Kadant Inc., JPMorgan Chase Bank, N.A., as administrative agent and the
lenders party thereto.
|
|
|
|
|
|
31.1
|
|
Certification
of the Principal Executive Officer of the Registrant Pursuant to Rule
13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act of 1934, as
amended.
|
|
|
|
|
|
31.2
|
|
Certification
of the Principal Financial Officer of the Registrant Pursuant to Rule
13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act of 1934, as
amended.
|
|
|
|
|
|
32
|
|
Certification
of the Chief Executive Officer and the Chief Financial Officer of the
Registrant Pursuant to
18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
|
|
|
|
|
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|
|
|
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|
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