Kadant Inc. — Form 10-Q Summary
Period clarification: The supplied filing is for the quarter ended June 30, 2018 (second quarter 2018), with comparative results for the quarter ended July 1, 2017. This differs from the request metadata’s “2017 Q2.” Figures are unaudited; amounts are U.S. dollars.
Business context and reporting period
Kadant supplies equipment and components to process industries through Papermaking Systems and Wood Processing Systems, and sells Fiber-based Products. The filing reports three- and six-month results through June 30, 2018. Revenue growth was substantially influenced by 2017 acquisitions, including the forest products business acquired in July 2017 and Unaflex assets acquired in August 2017.
Key financial metrics
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Revenue | $154.9 million | $110.2 million | $304.1 million | $213.1 million |
| Operating income | $19.7 million | $11.7 million | $36.4 million | $23.9 million |
| Net income attributable to Kadant | $12.3 million | $8.1 million | $23.2 million | $17.0 million |
| Diluted EPS | $1.08 | $0.72 | $2.04 | $1.52 |
| Consolidated gross margin | 44.0% | 47.9% | 44.1% | 47.8% |
Q2 revenue increased about 41% year over year; management attributed $28.9 million of the increase to acquisitions and $4.7 million to favorable currency translation. Excluding both, revenue increased $11.1 million. Six-month revenue rose about 43%; acquisitions contributed $63.6 million and favorable currency translation $11.4 million, while revenue excluding those effects increased $16.0 million.
For the six months, operating cash flow was $35.6 million, versus $25.4 million a year earlier. Capital expenditures were $10.2 million versus $3.4 million. Cash, cash equivalents, and restricted cash totaled $61.2 million at June 30, compared with $76.8 million at December 30, 2017. Working capital was $122.4 million, down from $133.8 million.
Total long-term obligations were $206.9 million, including $202.2 million outstanding on the revolving credit facility; $98.3 million of revolver capacity remained available. The revolver’s weighted-average interest rate was 2.97%. Kadant reported compliance with its credit covenants. On July 6, after quarter-end, it borrowed $21.0 million under a secured real-estate loan at a fixed 4.45% rate and used the proceeds to repay part of its U.S.-dollar revolver borrowings.
Material changes versus the comparable period
- Q2 operating income rose to $19.7 million from $11.7 million; six-month operating income rose to $36.4 million from $23.9 million. Kadant-attributable net income increased 52% in Q2 and 36% for the first six months.
- Gross margin declined in both periods. Management cited lower margins on capital equipment, a lower share of higher-margin parts and consumables, and acquired businesses’ product mix.
- Wood Processing revenue growth mainly reflected the acquired forest products business. Excluding acquisitions and currency, Wood Processing revenue declined 18% in Q2 and 10% for the six-month period, primarily due to shipment timing.
- Interest expense increased to $1.9 million in Q2 from $0.4 million and to $3.6 million for six months from $0.7 million, primarily due to acquisition-related borrowing.
- Six-month debt repayments were $46.8 million, partly offset by $16.0 million of new revolver borrowings. Cash used in financing activities was $38.8 million.
Outlook, commentary, risks and unusual items
- Management raised 2018 revenue guidance to $630–$638 million from $625–$635 million, but lowered GAAP diluted EPS guidance to $4.89–$4.99 from $4.98–$5.08. Q3 guidance is revenue of $162–$166 million and diluted EPS of $1.35–$1.40.
- The revised annual EPS outlook reflects a $0.19-per-share impact from a stronger U.S. dollar and a $0.09-per-share impact from tariffs on certain Chinese imports, partly offset by a better second-half outlook. The company estimated the tariffs would reduce remaining-2018 gross margin by $1.4 million and is pursuing pricing and sourcing measures.
- Guidance includes $1.5 million of pre-tax restructuring costs, $0.3 million of acquired-backlog amortization, and a $0.1 million discrete tax benefit. The company recorded $1.3 million of restructuring costs in the first half and expected about $0.2 million more in the second half for consolidation of U.S. and Swedish Stock-Preparation operations.
- Bookings rose 47% in Q2 to $176 million; excluding acquisitions and currency effects, they increased 11%. Management cited strength in Stock-Preparation and Fluid-Handling. It also noted potential near-term pressure on Chinese parts-and-consumables demand from recovered-paper import restrictions, alongside increased capital-equipment demand from capacity investment in Southeast Asia.
- The six-month effective tax rate was 28%, versus 25% in 2017. Tax expense reflects, among other factors, GILTI, worldwide earnings mix, and adjustments to provisional Tax Act estimates. Kadant stated that its Tax Act and GILTI accounting remained subject to further analysis and could change materially.
- Other risks include raw-material cost pressure, foreign-exchange movements, trade restrictions and tariffs, collection and repatriation risks in international markets, and dependence on cyclical customer capital spending. The filing reports ordinary-course litigation and $10.4 million of transferred Chinese banker’s acceptance drafts subject to recourse; it says these drafts historically settled without recourse claims.
Important facts for investors to verify
- Confirm the correct reporting period: this is a 2018 Q2 filing, not a 2017 Q2 filing.
- Assess how much reported growth and future performance depend on acquisitions, and whether underlying organic demand continues to improve.
- Track gross-margin recovery, product mix, raw-material costs, tariff mitigation, and the actual effects of currency movements against guidance.
- Monitor debt, interest expense, revolver availability, covenant compliance, and the cost and secured terms of the post-quarter real-estate loan.
- Review final Tax Act and GILTI estimates, as well as the effect of Chinese recovered-paper restrictions and trade developments on customer demand and supply costs.