Kadant Reports 2016 Second Quarter Results

Kadant Reports 2016 Second Quarter Results

Kadant Inc. (NYSE:KAI) reported its financial results for the second quarter ended July 2, 2016.

Second Quarter 2016 Financial Highlights

• GAAP diluted earnings per share (EPS) declined 1% to $0.75 in the second quarter of 2016 compared to $0.76 in the second quarter of 2015. The second quarter of 2016 included a $0.04 unfavorable effect of foreign currency translation. Guidance was $0.50 to $0.53.
• Adjusted diluted EPS increased 13% to $0.88 in the second quarter of 2016 compared to $0.78 in the second quarter of 2015. Adjusted diluted EPS in the second quarter of 2016 excludes $0.12 of expense for acquired profit in inventory and backlog and $0.01 of acquisition costs related to the acquisition of the PAALGROUP.
• Revenue increased 14% to $112 million in the second quarter of 2016 compared to $98 million in the second quarter of 2015, including a $15 million, or 16%, increase from an acquisition and a $2 million, or 2%, decrease from the unfavorable effect of foreign currency translation. Excluding the acquisition and foreign currency translation effect, revenue was flat in the second quarter of 2016 compared to the second quarter of 2015. Guidance was $103 to $105 million.
• Gross margin was 44.9% in the second quarter of 2016 compared to 46.5% in the second quarter of 2015.
• Net income attributable to Kadant was strong at $8 million in both the second quarters of 2016 and 2015. Adjusted EBITDA increased 14% to a record $18 million in the second quarter of 2016 compared to $16 million in the second quarter of 2015.
• Bookings increased 5% to $98 million in the second quarter of 2016 compared to $94 million in the second quarter of 2015, including a $14 million, or 15%, increase from an acquisition and a $2 million, or 2%, decrease from the unfavorable effect of foreign currency translation. Excluding the acquisition and foreign currency translation effect, bookings decreased 8% in the second quarter of 2016 compared to the second quarter of 2015.
• Cash flows from operations were $14 million in both the second quarters of 2016 and 2015. Net debt (debt less cash) was $9 million at the end of the second quarter of 2016.

Note: Adjusted diluted EPS and adjusted EBITDA are non-GAAP financial measures that exclude certain items as detailed later in this press release under the heading “Use of Non-GAAP Financial Measures” and in the reconciliation tables below.

Management Commentary

“We had an exceptional second quarter for revenue and earnings per share performance, which exceeded our guidance,” said Jonathan W. Painter, president and chief executive officer of Kadant Inc. “Our adjusted diluted EPS was $0.88 in the second quarter of 2016, which was better than expected primarily due to strong performances from several operating units within our Stock-Preparation product line, which includes our most recent acquisition. In addition, the operating results from our Wood Processing and our Doctoring, Cleaning, & Filtration product lines were better than expected, the latter of which was due to the shipment of several large capital projects in the quarter.

“Despite the challenging economic headwinds experienced in most regions of the world in the first half of 2016, our internal revenue growth, excluding the acquisition and unfavorable effect of foreign currency translation, was a solid four percent. We are encouraged by the successes we have enjoyed from our strategic growth initiatives and the positive results we are seeing.”

Second Quarter 2016

Net income from continuing operations was $8.3 million in the second quarter of 2016, or $0.75 per diluted share, compared to $8.5 million, or $0.76 per diluted share, in the second quarter of 2015. Net income from continuing operations in the second quarter of 2016 included $1.4 million, or $0.12 per diluted share, of after-tax costs related to acquired profit in inventory and backlog and $0.1 million, or $0.01 per diluted share, of after-tax acquisition costs. Net income from continuing operations in the second quarter of 2015 included $0.2 million, or $0.02 per diluted share, of after-tax restructuring costs. Adjusted net income, a non-GAAP measure, was $9.8 million, or $0.88 per diluted share, in the second quarter of 2016 compared to $8.7 million, or $0.78 per diluted share, in the second quarter of 2015.

Operating income decreased three percent to $12.2 million in the second quarter of 2016 compared to $12.6 million in the second quarter of 2015. Operating income included $1.9 million of expense related to acquired profit in inventory and backlog and $0.3 million of acquisition costs in the second quarter of 2016. Operating income included $0.3 million of expense related to restructuring and acquired profit in inventory and backlog in the second quarter of 2015. Adjusted operating income, a non-GAAP measure, was $14.4 million in the second quarter of 2016 compared to $12.9 million in the second quarter of 2015.

Guidance

“We are pleased with our strong revenue and EPS performance in the second quarter, which was well above our forecast,” Mr. Painter continued. “Despite these strong results, weakening global market conditions have tempered our outlook for the second half of the year. For 2016, we expect revenues of $415 to $421 million, revised from our previous guidance of $412 to $422 million. We expect to achieve GAAP diluted EPS for 2016 of $2.75 to $2.81, revised from our previous guidance of $2.75 to $2.85. Our revised 2016 guidance includes $0.13 of acquisition costs, $0.12 of expense related to acquired profit in inventory and backlog, and a $0.02 gain on the sale of assets. Excluding the acquisition-related costs and gain, our adjusted diluted EPS guidance for 2016 is $2.98 to $3.04. For the third quarter of 2016, we expect to achieve GAAP diluted EPS of $0.62 to $0.65 on revenue of $103 to $105 million.”

Conference Call

Kadant will hold a webcast with a slide presentation for investors on Thursday, August 4, 2016, at 11 a.m. eastern time to discuss its second quarter performance, as well as future expectations. To access the webcast, including the slideshow and accompanying audio, go to www.kadant.com and click on “Investors”. To listen to the webcast via teleconference, call 888-326-8410 within the U.S., or +1-704-385-4884 outside the U.S. and reference participant passcode 46143277. Prior to the call, our earnings release and the slides used in the webcast presentation will be filed with the Securities and Exchange Commission and will be available at www.sec.gov. An archive of the webcast presentation will be available on our Web site until September 2, 2016.

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

Use of Non-GAAP Financial Measures

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

We believe that these non-GAAP financial measures, when taken together with the corresponding GAAP financial measures, provide meaningful supplemental information regarding our performance by excluding certain items that may not be indicative of our core business, operating results, or future outlook. We believe that the inclusion of such measures helps investors to gain an understanding of our underlying operating performance and future prospects, consistent with how management measures and forecasts our performance, especially when comparing such results to previous periods or forecasts and to the performance of our competitors. Such measures are also used by us in our financial and operating decision-making and for compensation purposes. We also believe this information is responsive to investors' requests and gives them an additional measure of our performance.

The non-GAAP financial measures included in this press release are not meant to be considered superior to or a substitute for the results of operations prepared in accordance with GAAP. In addition, the non-GAAP financial measures included in this press release have limitations associated with their use as compared to the most directly comparable GAAP measures, in that they may be different from, and therefore not comparable to, similar measures used by other companies.

Revenue included $15.2 million from an acquisition in the second quarter and first six months of 2016. Revenue also included a $2.0 million and $5.7 million unfavorable foreign currency translation effect in the second quarter and first six months of 2016, respectively. We present increases or decreases in revenue excluding the effect of acquisitions and foreign currency translation to provide investors insight into underlying revenue trends.

Adjusted operating income, adjusted EBITDA, adjusted net income, and adjusted diluted EPS exclude acquisition costs, restructuring costs, other income, and expense related to acquired inventory and backlog. These items are excluded as they are not indicative of our core operating results and are not comparable to other periods, which have differing levels of incremental costs or income or none at all.

Adjusted operating income and adjusted EBITDA exclude:

• Pre-tax gain on the sale of assets of $0.3 million in the first six months of 2016. Pre-tax restructuring costs of $0.2 million in the second quarter of 2015 and $0.3 million in the first six months of 2015.
• Pre-tax acquisition costs of $0.3 million in the second quarter of 2016 and $1.7 million in the first six months of 2016.
• Pre-tax expense related to acquired profit in inventory and backlog of $1.9 million in the second quarter and first six months of 2016 and $0.2 million in the first six months of 2015.

Adjusted net income and adjusted diluted EPS exclude:

• After-tax gain on the sale of assets of $0.2 million ($0.3 million net of tax of $0.1 million) in the first six months of 2016 and after-tax restructuring costs of $0.2 million in the second quarter and $0.2 million ($0.3 million net of tax of $0.1 million) in the first six months of 2015.
• After-tax acquisition costs of $0.1 million ($0.3 million net of tax of $0.2 million) in the second quarter of 2016 and $1.4 million ($1.7 million net of tax of $0.3 million) in the first six months of 2016.
• After-tax expense related to acquired profit in inventory and backlog of $1.4 million ($1.9 million net of tax of $0.5 million) in the second quarter and first six months of 2016. After-tax expense related to acquired profit in inventory and backlog of $0.1 million ($0.2 million net of tax of $0.1 million) in the first six months of 2015.

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

(a) Represents the increase (decrease) resulting from the conversion of current period amounts reported in local currencies into U.S. dollars at the exchange rate of the prior period compared to the U.S. dollar amount reported in the prior period.

(b) Represents a non-GAAP financial measure.

(c) Geographic revenues are attributed to regions based on customer location.

(d) Represents transaction costs related to our acquisition of RT Holding GmbH, the parent corporation of a group of companies known as the PAALGROUP.

(e) Represents intangible amortization expense associated with acquired backlog.

(f) Represents expense within cost of revenues associated with acquired profit in inventory.

(g) See reconciliation to the most directly comparable GAAP financial measure under "Adjusted Operating Income and Adjusted EBITDA Reconciliation."

(h) Prior period amounts have been restated to conform to the current period presentation as a result of the adoption of the Financial Accounting Standards Board's Accounting Standards Update No. 2016-09.

About Kadant

Kadant Inc. is a global supplier of high-value, critical components and engineered systems used in process industries worldwide. The Company’s products, technologies, and services play an integral role in enhancing process efficiency, optimizing energy utilization, and maximizing productivity in resource-intensive industries. Kadant is based in Westford, Massachusetts, with revenue of $390 million in fiscal year 2015 and 2,000 employees in 18 countries worldwide. For more information, visit www.kadant.com.

The following constitutes a “Safe Harbor” statement under the Private Securities Litigation Reform Act of 1995: This press release contains forward-looking statements that involve a number of risks and uncertainties, including forward-looking statements about our expected future financial and operating performance, demand for our products, and economic and industry outlook. Our actual results may differ materially from these forward-looking statements as a result of various important factors, including those set forth under the heading "Risk Factors" in Kadant’s annual report on Form 10-K for the year ended January 2, 2016 and subsequent filings with the Securities and Exchange Commission. These include risks and uncertainties relating to adverse changes in global and local economic conditions; the variability and difficulty in accurately predicting revenue from large capital equipment and systems projects; the variability and uncertainties in sales of capital equipment in China; currency fluctuations; our customers’ ability to obtain financing for capital equipment projects; changes in government regulations and policies; the oriented strand board market and levels of residential construction activity; development and use of digital media; price increases or shortages of raw materials; dependence on certain suppliers; international sales and operations; disruption in production; our acquisition strategy; our internal growth strategy; competition; soundness of suppliers and customers; our effective tax rate; future restructurings; soundness of financial institutions; our debt obligations; restrictions in our credit agreement; loss of key personnel; reliance on third-party research; protection of patents and proprietary rights; failure of our information systems or breaches of data security; fluctuations in our share price; and anti-takeover provisions. We undertake no obligation to publicly update any forward-looking statement, whether as a result of new information, future events, or otherwise.

Kadant Inc.
Investor contact:
Michael McKenney, 978-776-2000
or
Media contact:
Wes Martz, 269-278-1715

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