Kadant Inc. — Form 10-K Summary
Period clarification: The supplied filing is Kadant’s annual report for the fiscal year ended December 28, 2019, filed February 25, 2020—not a 2018 Q4 filing. It includes quarterly comparative information for 2018 and 2019.
Business context
Kadant supplies engineered equipment, components, and consumables for papermaking, wood processing, and material handling, and sells fiber-based products. Its three reportable segments are Papermaking Systems, Wood Processing Systems, and Material Handling Systems. The company acquired Syntron Material Handling Group (SMH) on January 2, 2019, for $176.9 million net of cash acquired; SMH contributed $83.4 million of 2019 revenue.
Financial performance and liquidity
| Metric | FY2019 | FY2018 |
|---|---|---|
| Revenue | $704.6 million | $633.8 million |
| Operating income | $87.8 million | $88.6 million |
| Net income attributable to Kadant | $52.1 million | $60.4 million |
| Diluted EPS | $4.54 | $5.30 |
| Operating cash flow | $97.4 million | $63.0 million |
| Consolidated gross margin | 41.7% | 43.9% |
| Working capital | $151.4 million | $123.8 million |
Revenue increased 11%; excluding the SMH acquisition and currency translation, it rose 1%. Operating income declined slightly, while attributable net income fell 14% and diluted EPS fell 14%. Gross margin contracted largely because the acquired Material Handling Systems segment had lower margins. Operating cash flow improved, with working-capital changes providing $2.0 million in 2019. Capital expenditures were $10.0 million.
Year-end cash and cash equivalents were $66.8 million, of which $58.9 million was held by foreign subsidiaries. Total long-term obligations, including current maturities, were $301.0 million; revolving credit facility borrowings were $265.4 million. The company reported $135.1 million of remaining capacity under its $400 million revolving facility and a 2.03 leverage ratio, within its covenants. Total backlog was $170.3 million, versus $173.0 million a year earlier; substantially all was expected to ship or be completed in 2020.
Bookings rose 3% to $688 million, including acquisition contributions and currency effects; excluding both, bookings declined 8%. Parts and consumables represented 64% of bookings, up from 56% in 2018. International customers accounted for approximately 56% of revenue, down from 63%, primarily reflecting SMH’s U.S.-weighted sales.
Material changes and unusual items
- SMH added a new reportable segment and increased revenue, goodwill, acquired intangible assets, and debt. The acquisition was funded primarily with revolving borrowings.
- Interest expense rose to $12.8 million from $7.0 million, mainly due to acquisition-related borrowings.
- A $5.9 million pension settlement loss contributed to higher other expense. The U.S. retirement plan was settled in 2019; the $2.4 million Restoration Plan obligation was paid in early 2020.
- Kadant recorded $2.3 million of intangible-asset impairment and $0.2 million of severance costs for its timber-harvesting product line, whose market weakness was expected to continue into 2020.
- The 2019 fourth quarter had revenue of $182.7 million and attributable net income of $8.7 million, compared with $163.9 million and $18.4 million, respectively, in fourth-quarter 2018. The 2019 quarter included the pension settlement and timber-harvesting impairment.
- The dividend declared per common share increased to $0.92 for 2019 from $0.88 in 2018. No shares were repurchased in fourth-quarter 2019.
Outlook, commentary, and risks
- Management expected the 2020 effective tax rate to be 27.5%–28.5% and planned $12–$14 million of capital expenditures. It stated that cash, expected operating cash flow, and available borrowing capacity should cover current operating needs for the foreseeable future.
- Management anticipated continued weakness in Chinese capital-equipment demand and in timber-harvesting products. It described softer near-term conditions in Europe and material handling, with the mining market expected to remain weak through 2020.
- The filing discusses the coronavirus outbreak reported in China in early 2020: Chinese facilities faced government-mandated closures and restrictions, and management could not estimate the effect on production, shipments, supply chains, or financial results.
- Other material risks include customer capital-spending cycles, trade tariffs and U.S.-China tensions, currency movements, raw-material availability and costs, exposure to housing, forestry, mining, and coal markets, acquisition integration, and debt covenants and refinancing. Revolving borrowings mature in 2023; LIBOR transition may affect borrowing costs.
- Letters of credit and bank guarantees totaled $19.6 million, principally supporting customer performance and deposit obligations. The company reported routine-course claims and litigation but no specific material legal proceeding in Item 3.
- Management and the auditor concluded that financial reporting controls were effective; the assessment excluded SMH’s internal controls, although its financial results were consolidated.
Important facts for investors to verify
- How much of 2019’s reported growth and earnings contribution from SMH is sustainable, and how its integration and margins progress.
- Whether underlying bookings and organic growth recover, especially in China, Europe, wood processing, and mining; monitor backlog conversion and cancellations.
- Whether timber-harvesting weakness continues and leads to further restructuring, impairment, or cash-flow pressure.
- Debt repayment and refinancing capacity ahead of the 2023 revolving-facility maturity, including covenant headroom, interest-rate exposure, and dividend flexibility.
- The operational and financial effects of the coronavirus restrictions, tariffs, foreign exchange, and potential supplier or customer disruptions.
- The assumptions behind the 2020 tax-rate outlook and the valuation of acquired customer relationships, goodwill, and other intangible assets.